1. Cash Recovery Method Revenue Recognition Used when uncertainty exists for collecting cash from sales.

2. Cash Recovery Method Revenue Recognition Used when uncertainty exists for collecting cash from sales. Gross profit is deferred until cash collections exceed costs.

3. Cash Recovery Method Revenue Recognition Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999.

4. Cash Recovery Method Revenue Recognition YearCash ReceivedCost still not yet recovered Gross Profit Realized for the Year Feb 1, 1999----28,000---- Dec 31, 1999 Dec 31, 2000 Dec 31, 2001 Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999.

5. Cash Recovery Method Revenue Recognition YearCash ReceivedCost still not yet recovered Gross Profit Realized for the Year Feb 1, 1999----28,000---- Dec 31, 199915,000 Dec 31, 2000 Dec 31, 2001 Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999.

6. Cash Recovery Method Revenue Recognition YearCash ReceivedCost still not yet recovered Gross Profit Realized for the Year Feb 1, 1999----28,000---- Dec 31, 199915,00013,000 Dec 31, 2000 Dec 31, 2001 Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999.

7. Cash Recovery Method Revenue Recognition Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999. YearCash ReceivedCost still not yet recovered Gross Profit Realized for the Year Feb 1, 1999----28,000---- Dec 31, 199915,00013,0000 Dec 31, 2000 Dec 31, 2001 $0, since we still have not fully recovered our costs.

8. Cash Recovery Method Revenue Recognition So, the 1999 journal entries are:

9. Cash Recovery Method Revenue Recognition So, the 1999 journal entries are: Feb 1:Accounts Receivable$45,000 Inventory Sales$45,000 note: sold inventory to Husker Corp.

10. Cash Recovery Method Revenue Recognition So, the 1999 journal entries are: Feb 1:Accounts Receivable$45,000 Inventory Sales$45,000 note: sold inventory to Husker Corp. Dec 31:Inventory Sales$45,000 Cost of Goods Sold$28,000 Deferred Gross Profit$17,000 note: close out the Inventory Sales account

11. Cash Recovery Method Revenue Recognition So, the 1999 journal entries are: Feb 1:Accounts Receivable$45,000 Inventory Sales$45,000 note: sold inventory to Husker Corp. Dec 31:Inventory Sales$45,000 Cost of Goods Sold$28,000 Deferred Gross Profit$17,000 note: close out the Inventory Sales account This represents $0 of realized profit that we computed earlier.

12. Cash Recovery Method Revenue Recognition Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999. YearCash ReceivedCost still not yet recovered Gross Profit Realized for the Year Feb 1, 1999----28,000---- Dec 31, 199915,00013,0000 Dec 31, 200015,000 Dec 31, 2001

13. Cash Recovery Method Revenue Recognition Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999. YearCash ReceivedCost still not yet recovered Gross Profit Realized for the Year Feb 1, 1999----28,000---- Dec 31, 199915,00013,0000 Dec 31, 200015,00002,000 Dec 31, 2001 Once the costs are recovered, we begin to realize profit.

14. Cash Recovery Method Revenue Recognition So, the 2000 journal entry is: Dec 31:Deferred Gross Profit$2,000 Realized Gross Profit$2,000 note: recognize gross profit on 1999 sales to Husker

15. Cash Recovery Method Revenue Recognition Example: Paterno Corp. sells inventory on Feb 1, 1999 to Husker Corp. for a total of $45,000. The cost of inventory to Paterno Corp. is $28,000. Cash payments are due: $15,000 each year for three years, beginning the end of 1999. YearCash ReceivedCost still not yet recovered Gross Profit Realized for the Year Feb 1, 1999----28,000---- Dec 31, 199915,00013,0000 Dec 31, 200015,00002,000 Dec 31, 200115,0000

16. Cash Recovery Method Revenue Recognition So, the 2000 journal entry is: Dec 31:Deferred Gross Profit$2,000 Realized Gross Profit$2,000 note: recognize gross profit on 1999 sales to Husker Similarly, the 2001 journal entry is: Dec 31:Deferred Gross Profit$15,000 Realized Gross Profit$15,000 note: recognize gross profit on 1999 sales to Husker