Reliable Enterprises sells distressed merchandise on extended credit terms. Coll
ID: 2452891 • Letter: R
Question
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales
aren't reasonably assured and bad debt losses can't be reasonably predicted. It's unlikely that repossessed
merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise
costing $30,000 was sold for $55,000 in 2010. Collections on this sale were $20,000 in 2010, $15,000 in
2011, and $20,000 in 2012.
In 2010, Reliable would recognize gross profit of
A. $8,333.
B. $8,090.
C. $0.
D. $25,000.
Explanation / Answer
Answer C $0
since Reliable use cost recovery method and since it did not cover its cost in 2010 so no profit is realised ( only $20,000 is realised and cost $30,000 since full cost is not realised so no profit in 2010)