Cowden Properties Cowden Properties sold a condominium to Ms. Roberts for $90,00

ID: 2448287 • Letter: C

Question

Cowden Properties 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 installment method, how much cost is recognized as expense in year 3? a. $10,000 b. $15,000 c. $20,000 d. $25,000 e. $30,000

Refer to the Cowden Properties example. Under the installment method, how much net profit would Cowden recognize in year 1? a. $1,667 b. $2,667 c. $3,333 d. $3,667 e. $5,000

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

Explanation / Answer

solution :

If Cowden uses the installment method, how much cost is recognized as expense in year 3

(30000/90000)*60000

20,000

In this method only cost proporationate to receipt is recognised as expense

Under the installment method, how much net profit would Cowden recognize in year 1

5000 - (60000*5000/90000)

1,667

Year 1 receipt (i.e 5000) - proportionate cost (i.e 60000*5000/90000)

If Cowden uses the cost-recovery-first method, how much profit is recognized in year 4

30000

In this mehod profit is deffered till cost is recovered

receipt till year 3 is (5000+10000+30000) = 45000 which is less than cost of 60000 hence whole profit will be recognised in year 4