A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported?

Question

Quizplus · Accepted Answer

The cost-recovery method is the least likely to overstate the amount of gross profit reported because revenue is recognized only after the total cost of the equipment is recovered. This conservative approach ensures that profit is not recognized prematurely and limits the risk of bad debt. The completion of production method and sales method may overstate profits if there is uncertainty about the collectability of the installment payments. The installment-sales method recognizes profits based on estimates of collectability and may overstate profits if those estimates are too optimistic.

A Manufacturer of Large Equipment Sells on an Installment Basis