CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

A company has just completed the sale of a tract of land for $3.5 million; it was originally acquired at a cost of $2.0 million. The purchaser made a down payment of $200,000 with the remainder to be paid in equal installments over the next 10 years. A short time after the sale, significant doubt arose about the purchaser's ability to meet the future obligations for the land purchase. When compared to the cost recovery method of revenue recognition, the profit (in $) that the company will recognize in the year of the sale under the installment method is most likely to be higher by ______.
A. $68,523
B. $85,714
C. $104,328
Explanation: Under the installment method, the portion of the total profit of the sale (3.5 - 2.0 = 1.5) that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash, which is 1.5/3.5 x 200,000 = $85,714; under the cost recovery method, no profit is recognized until the cash amounts received have exceed the seller's cost of the property.

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