Reference no: EM131210837
On October 1, 2016, the Marshall Company sold a large piece of machinery to the Hammond Construction Company for $80,000. The cost of the machine was $40,000. Hammond made a down payment of $10,000 and agreed to pay the remaining balance in seven equal monthly installments of $10,000, plus interest at 12% on the unpaid balance, beginning November 1. Required: Identify three alternative methods for recognizing revenue and costs for the situation described and compute the amount of gross profit that would be recognized in 2016 using each method. Discuss the circumstances under which each of the three methods would be used. My answer to question On October 1, 2016, the Marshall Company sold a large piece of machinery to the Hammond Construction Company for $80,000.
The cost of the machine was $40,000. Hammond made a down payment of $10,000 and agreed to pay the remaining balance in seven equal monthly installments of $10,000, plus interest at 12% on the unpaid balance, beginning November 1. Required: Identify three alternative methods for recognizing revenue and costs for the situation described and compute the amount of gross profit that would be recognized in 2016 using each method. The Realization principle-Gross Profit $40,000 Installment Sales Method- Gross Profit $33,600 Cost Recovery Method-$0 Discuss the circumstances under which each of the three methods would be used.
The Realization principle-The earnings process is judged to be complete or virtually complete. There is reasonable certainty as to the collectability of the asset to be received (usually cash) Installment Sales Method-recognizes the gross profit by applying the gross profit percentage on the sale to the amount of cash actually received. Cost Recovery Method-Defers all gross profit recognition until cash equal to the cost of the item sold has been received. Spiceland, J.D., Sepe, J.F., Nelson, M.W., & Thomas, W.B. (2016) Intermediate Accounting. 8th ed. New York: McGraw Hill. those this make any senses.
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