Arid Lands,Inc.is engaged in extensive exploration for water in the Caprock Desert.If upon discovery of water the corporation does not recognize any revenue from water sales until the sales exceed the costs of exploration,the basis of revenue recognition being employed is the
A)Production basis
B)Cash or collection)basis
C)Sales or accrual)basis
D)Sunk cost or cost recovery)basis

Question

Quizplus · Accepted Answer

The basis of revenue recognition being employed is the sunk cost or cost recovery basis, where the corporation will recognize revenue only when the sales exceed the costs of exploration. This means that the costs incurred for exploration are treated as sunk costs and will be recovered from the sales revenue before recognizing any profit. This method is commonly used in industries where significant costs are incurred for exploration, and the revenue recognition is delayed until the costs are recovered.