be able to do a long term construction project that has a loss. 15. Alpha C and

Question

be able to do a long term construction project that has a loss. 15. Alpha C and the balance will be paid ratably during 2017 through 2020 (4 years) The original cost of the land to Alpha was $900,000 Alpha has decided to use the the installment method for recognizing profit. o sold a piece of land for 1,200.000. Alpha will receive a down payment of 300,000 in 2016 How much profit will Alpha record in each of the 5 years (2016-2020) 16. Alpha instead uses the cost recovery method to recognize profit. How much profit will Alpha record each year?

Explanation / Answer

Revenue recognition and profit recorded through installment method Under Installment method , a gross profit % is applied to amount realised during the year to record profit. Gross profit % = Gross Profit / Sales = (Sale value - Cost value)/Sale value = ($1200000 - $900000)/$1200000 = 25% Year Revenue Recognised Gross profit % Profit Recorded A B C B*C 2016 $300,000.00 25% $75,000.00 2017 $225,000.00 25% $56,250.00 2018 $225,000.00 25% $56,250.00 2019 $225,000.00 25% $56,250.00 2020 $225,000.00 25% $56,250.00 Revenue recognition and profit recorded through Cost recovery method Under this method revenue from a sale is recognized only to the extent of receipts from the buyer. In periods in which the initial payments are received no gross profit is reported because the revenue recognized equals the amounts received. and a cost equal to the revenue recognized is charged to the income statement. Once all the cost has been ecovered the final payments consist of the gross profit earned on the sale. Year Revenue Recognised Cost Considered Profit Recorded A B C B-C 2016 $300,000.00          300,000.00 $0.00 2017 $225,000.00          225,000.00 $0.00 2018 $225,000.00          225,000.00 $0.00 2019 $225,000.00          150,000.00 $75,000.00 2020 $225,000.00                            -   $225,000.00

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