Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2010. Collections on this sale were $20,000 in 2010, $15,000 in 2011, and $20,000 in 2012.
In 2010, Reliable would recognize gross profit of:
- $25,000.
- $8,333.
- $8,090.
- $0.
In its 2010 year-end balance sheet, Reliable would report installment receivables (net) of:
- $35,000.
- $25,909.
- $10,000.
- $20,000.