The Installment and Cost Recovery Methods of Revenue Recognition
Assume the total sales price and cost of a property are $2,000,000 and $1,100,000, respectively, so that the total profit to be recognized is $900,000. The amount of cash received by the seller as a down payment is $300,000, with the remainder of the sales price to be received over a 10-year period. It has been determined that there is significant doubt about the ability and commitment of the buyer to complete all payments. How much profit will be recognized attributable to the down payment if:
1. the installment method is used?
2. the cost recovery method is used?
EXAMPLE 4-5 Gross versus Net Reporting of Revenues
Flyalot has agreements with several major airlines to obtain airline tickets at reduced rates. The company pays only for tickets it sells to customers. In the most recent period, Flyalot sold airline tickets to customers over the Internet for a total of $1.1 million. The cost of these tickets to Flyalot was $1 million. The company’s direct selling costs were $2,000. Once the customers receive their ticket, the airline is responsible for providing all services associated with the customers’ flight.
1. Demonstrate the reporting of revenues under:
A. gross reporting.
B. net reporting.
2. Determine and justify the appropriate method for reporting revenues.