Problem:
Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $56,250 in 2010. Collections on this sale were $20,500 in 2010, $15,700 in 2011, and $20,050 in 2012.
In 2010, Reliable would recognize gross profit of:
a $26,250.
b $ 0.
c $8,750.
d $ 8,107