C is corrent. Under the cost recovery method no profit of any type is recognized until the cumulative receipts (principal and interest) exceed the cost of the asset sold. This means that the entire gross profit ($3,000,000 – $2,000,000 = $1,000,000) and the year 2 interest received ($270,000) will be deferred until cash collections exceed $2,000,000. Therefore, no income is recognized in year 2.
A is incorrect. Under the cost recovery method no profit of any type is recognized until the cumulative receipts (principal and interest) exceed the cost of the asset sold. This means that the entire gross profit ($3,000,000 – $2,000,000 = $1,000,000) and the year 2 interest received ($270,000) will be deferred until cash collections exceed $2,000,000. Therefore, no income is recognized in year 2.
B is incorrect. Under the cost recovery method no profit of any type is recognized until the cumulative receipts (principal and interest) exceed the cost of the asset sold. This means that the entire gross profit ($3,000,000 – $2,000,000 = $1,000,000) and the year 2 interest received ($270,000) will be deferred until cash collections exceed $2,000,000. Therefore, no income is recognized in year 2.
D is incorrect. Under the cost recovery method no profit of any type is recognized until the cumulative receipts (principal and interest) exceed the cost of the asset sold. This means that the entire gross profit ($3,000,000 – $2,000,000 = $1,000,000) and the year 2 interest received ($270,000) will be deferred until cash collections exceed $2,000,000. Therefore, no income is recognized in year 2.
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