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Topic: Becker F2 Cost Recovery Question HELP (

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conconrabbit
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Joined: 13 Sep 2012
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Posted: 13 Sep 2012 at 18:46 \| IP Logged

Question

Several of Fox, Inc.'s customers are having cash flow problems.
Information pertaining to these customers for the years ended
March 31, Year 1 and Year2 follows:
                      3/31/Year1 3/31/Year2
   Sales      & nbsp;     $10,000       $15,000
Cost of sales        8,000        9,000
Cash collections
on Year1   sales    7,000 &n bsp;    3,000
on Year2   sales      -      12,000

If the cost recovery method is used, what amount would Fox
report as gross profit from sales to these customers for the year
ended March 31, Year2?
a. $2,000
b. $3,000
c. $5,000
d. $15,000

Answer: C

I don't understand why the gross profit is 5000. I thought after the
costs are recovered for years, we should recognize the year 1's GP,
and it should be $2000.

Can someone plz explain it to me?

THanks!!!

empak
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Posted: 14 Sep 2012 at 17:41 \| IP Logged

In year 2 you recover all of year 1's costs plus $2000 in
GP. Also in year 2, you recover all of year 2's costs
($9000) plus $3000 in gross profit for a total of $12,000
collected from year 2 sales of $15,000. Therefore, you
report a total of $5000 ($3000 + $2000) in GP from sales
for the year ended 3/31/x2.

Hope that helps.

conconrabbit
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Posted: 14 Sep 2012 at 18:13 \| IP Logged

Thanks empak!!!!
Great explanation, it really helps!

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