C is corrent. Under the cost recovery method no profit of any type is recognized until the cumulative receipts exceed the cost of the asset sold. This means that the entire gross profit ($5,000,000 – $4,000,000 = $1,000,000) and the year 1 interest revenue ($132,000) will be deferred until cash collections exceed $4,000,000. Therefore, no income is recognized in year 1.
A is incorrect. Under the cost recovery method no profit of any type is recognized until the cumulative receipts exceed the cost of the asset sold. This means that the entire gross profit ($5,000,000 – $4,000,000 = $1,000,000) and the year 1 interest revenue ($132,000) will be deferred until cash collections exceed $4,000,000. Therefore, no income is recognized in year 1.
A is incorrect. Under the cost recovery method no profit of any type is recognized until the cumulative receipts exceed the cost of the asset sold. This means that the entire gross profit ($5,000,000 – $4,000,000 = $1,000,000) and the year 1 interest revenue ($132,000) will be deferred until cash collections exceed $4,000,000. Therefore, no income is recognized in year 1.
D is incorrect. Under the cost recovery method no profit of any type is recognized until the cumulative receipts exceed the cost of the asset sold. This means that the entire gross profit ($5,000,000 – $4,000,000 = $1,000,000) and the year 1 interest revenue ($132,000) will be deferred until cash collections exceed $4,000,000. Therefore, no income is recognized in year 1.
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