Which is then most conservative of the methods? a % completion b completed contract c sales method d cost recovery does anyone have a good way of explaining how to differentiate between cost recover, sales method and completed contract? they all seem very similar…
Conti Corporate sells new homes on installment. If collectability of the sales proceeds cannot be reasonably estimated, income is least likely to be overstated using which one of the following revenue recognition methods? a installment method b completed contract method c cost recovery d at the time the house was delivered
Cost Recovery is kindda make u worry about your own bucks first and then talk about profits. So, my guess is it’s the most conservative of all. If, recovery can’t be reasonably estimated, cost recovery method would least likely overstate your income… Correct me if i m wrong, please. Thanks.
Yup makes perfect sense. You do not recognize ur profits till u cover COGS.
- D, 2. A ?
for question 1, i would say B… you dont recognise any revenue until right at the end of the contract…thats gotta be the most conservative if ya ask me
D & A?
for question 2, i’d say B… i mean, if ur not recognising any revenue until project completion, then tehre is no income to overstate… im pretty just just going for completed contract since its the extreme…
TokyoBBB Wrote: ------------------------------------------------------- > Conti Corporate sells new homes on installment. If > collectability of the sales proceeds cannot be > reasonably estimated, income is least likely to be > overstated using which one of the following > revenue recognition methods? > > a installment method > b completed contract method > c cost recovery > d at the time the house was delivered answer was C.
witht hose two questions, whats the difference between cost recovry and completed contract? is there a reason why completed contract cant be the answer?
because collectability cannot be estimated. with completed contract, you know the client will pay, but you have no idea how much work is done to date. With cost recovery, you’re not sure if you’ll get paid and if so how much.
hmmm but with completed contract, estimates of costs/revenues are unreliable… so you’re not actually assuming anything… there is no contract, so really, ur just left in the dark, which is why you have to wait until completion before any profit is booked… yeh?
I always thought the following: Costs to be incurred still cannot be estimated => cost recovery method where you record all costs first and then maybe a profit If collectability of the revenues is in doubt, but costs can be estimated => installment method But if the answer is C then this is incorrect. Could someone explain when we use the installment method vs cost recovery ?
Well, the explanation provided was “Income recognition is delayed the most under cost recovery method because no profit is recognised until cash collections exceeds cost of the asset sold”
TokyoBBB Wrote: ------------------------------------------------------- > Well, the explanation provided was > > “Income recognition is delayed the most under cost > recovery method because no profit is recognised > until cash collections exceeds cost of the asset > sold” The point here being that its on the basis of cash, not billings when you recognise the profit. With a completed contract, you could complete the contract, invoice the customer, book the profit, but then you might not get paid. With cost recovery, you wait for payment of cash. I think!
that makes sense…
ahhh perfect sense… thanks chris and tokyo… i never realised taht before… so, if you were to order thoes revenue recognition methods from most conservative, to most aggressive, it would be: cost recovery completed contract installment method percentage of completion ???
bingo. I made the first question up by the way…
Bluey 1.8T Wrote: ------------------------------------------------------- > ahhh perfect sense… thanks chris and tokyo… > > i never realised taht before… > > so, if you were to order thoes revenue recognition > methods from most conservative, to most > aggressive, it would be: > > cost recovery > completed contract > installment method > percentage of completion > > ??? ish. installment method is more conservative than completed contract if the issue is that you don’t know if you are going to get paid, and completed contract is more conservative if you don’t know how much it will cost. That’s why you use them in those circumstances. cost recovery: unknown costs and uncertain collection completed contract: unknown costs only installment method: uncertain collection only percentage of completion: long term contract, no problems over cost/collection sales basis: short term, no problems.
thanks guys…i remember there being a thread about this about a week ago aswell… cant remember if the outcome was similar though