On November 15, 2016, LaGrow Developers sold a parcel of land for $4,000,000. They had originally paid $3,600,000 for the land. The terms of the sale called for a $1,000,000 down payment, and the balance in two equal installments payable on November 15, 2017 and November 15, 2018. Disregard interest charges. LaGrow has a December 31 year-end. Refer to LaGrow Developers. Assuming that LaGrow uses the cost-recovery method, the company would recognize gross profit in 2016 of ________.
A) $0
B) $400,000
C) $3,000,000
D) $1,000,000

Question

Quizplus · Accepted Answer

Under the cost-recovery method, no profit is recognized until the cost of the asset is fully recovered. Since the down payment of $1,000,000 does not cover the original cost of $3,600,000, no gross profit is recognized in 2016.

On November 15, 2016, LaGrow Developers Sold a Parcel of Land