Cowden Properties sold a condominium to Ms.Roberts for $90,000.Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000.The contract for sale required Ms.Roberts to pay the $90,000 as follows:
Year 1 - $ 5,000
Year 2 - $10,000
Year 3 - $30,000
Year 4 - $45,000
Refer to the Cowden Properties example.If Cowden uses the cost-recovery-first method, how much profit is recognized in year 4?
A)$45,000
B)$40,000
C)$30,000
D)$20,000
E)$15,000

Question

Quizplus · Accepted Answer

Using the cost-recovery-first method, the profit is recognized proportionally as the cost of the property is recovered. In year 4, Ms. Roberts will have paid a total of $90,000, which equals the selling price. The amount of cost of the property that has been recovered by that point is $40,000 (original cost) + $20,000 (improvements) + $5,000 (year 1 payment) + $10,000 (year 2 payment) + $30,000 (year 3 payment) = $105,000. This means that the total profit recognized would be $90,000 - $105,000 = -$15,000. However, since a negative profit doesn't make sense, the profit recognized should be $0. Therefore, no profit is recognized in year 4.

Cowden Properties Sold a Condominium to Ms