Bob the Builder sells houses. In these tough times he wants to be more conservative with his rev recognition, because he’s extremely worried about the collectibility of sales proceeds in this housing market. Of the following choices, which one would least like overstate his income a) Completed Contract method b) Installment Method c) Percentage-completion Method d) Cost recovery method
a or d will go with a
Extremely worried = D It can’t be A, as this the case of accrued revenue (but collectibility is not assured)
cost recovery is the method under IFRS, completed contract under USGAAP. I’d go with A too.
A is what’ i’s gowith.
He sells the house. Now if payment is assured then revenue is recognized immediately (as product is delievered). if payment is not assured ===> installment method if payment is highly uncertain (sub-prime) ===> cost recovery ???
i got tripped up to…and went with A it’s D…Cost-recovery method…because no profit is recognized until cash collected exceeds COGS.
I think that the key words are “worried about the collectibility of sales proceeds”. If he used the completed contract method, he is assuming that he is going to collect the revenue in his income statements. If he used the cost recovery method, it will be much more conservative as he will not recognize any profit until enough revenue has been collected to cover his expenses.
a) and d) will recognize revenue at the same time… it’s profit recognition that is different. either should be correct.