On January 1, 2014, Reids, Inc. sold a risky investment for $1,400 that had been purchased for $1,000. It was decided to use the cost recovery method of revenue recognition. Cash collections on accounts receivable related to the asset were as follows: Which of the following represent the realized gross profit that Reids should recognize for each year?
A) I
B) II
C) III
D) IV

Question

On January 1, 2014, Reids, Inc. sold a risky investment for $1,400 that had been purchased for $1,000. It was decided to use the cost recovery method of revenue recognition. Cash collections on accounts receivable related to the asset were as follows:  Which of the following represent the realized gross profit that Reids should recognize for each year? 
A) I 
B) II 
C) III 
D) IV

Quizplus · Accepted Answer

The cost recovery method of revenue recognition only recognizes revenue when the amount collected exceeds the original cost of the asset. In this case, the cash collections never exceed the original cost of $1,000 in any year except for Year I when the cash collections of $1,400 exceed the original cost. Therefore, the realized gross profit that Reids should recognize is only for Year I.