Prudence Inc. is engaged in manufacture and sale of specialized manufacturing equipment. It has...
Question:
Prudence Inc. is engaged in manufacture and sale of specialized manufacturing equipment. It has excess capacity of 30% so on January 1, 2017 the company's management sold equipment worth $20 million to Uncertainty, Inc. a company which is facing a liquidity crunch. Prudence, Inc. determines that collectability of this account is highly uncertain. The equipment cost $10 million in manufacturing costs. The receipts from Uncertainty in Fiscal Year 2017 were as follows:
| First Quarter Q1 | Second Quarter Q2 | Third Quarter Q3 | Fourth Quarter Q4 |
|---|---|---|---|
| $3 million | $6 million | $4 million | $7 million |
Provide the journal entries in each quarter under cost recovery method.
Cost Recovery Method:
The cost recovery method is another approach to recognize revenues. It is normally used when the sale is unlikely to be collected or the value of the sales cannot be determined. The method recognizes revenues when the company receives cash.
Answer and Explanation: 1
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View this answerUnder the cost recovery method, profit is not recognized unless the total cash receipts collected is greater than the cost. Let us make the necessary...
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What is Revenue Recognition? - Principles, Process & Examples
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Chapter 7 / Lesson 2
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Revenue recognition states that revenue is recorded when it is realized, or realizable and earned, as opposed to received. Learn about the principles and process of revenue recognition with examples of recognition criteria before exploring some exceptions to the rule.
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