For the cost recovery method, can interest income be recognize before cash is greater than cost? When I look at my books and online it says that you don't. But I found this question and it seems that interest is recognized.
The Radford Company bought four acres of land several years ago at a cost of $90,000 per acre. On January 1, Year One, Radford sold this same land for a total of $480,000. Starting on December 31, Year One, the buyer will make six annual payments of $80,000 per year plus interest on the unpaid balance at a 10 percent annual rate. The interest rate is viewed as reasonable and all payments are made on the required date. Because Radford officials felt that there was substantial doubt about the company's ability to collect this money, the cost recovery method was chosen for reporting purposes. What is the total impact on the net income reported for Year Two?
A $40,000
B $50,000
C $60,000
D $70,000
ANSWER IS A
EXPLANATION: Under the cost recovery method, no profit is recognized until cash equal to the cost of the asset is received. For this transaction, the cost of the land was $360,000 (four acres at $90,000 per acre). Radford collected $80,000 of that amount in Year One and another $80,000 in Year Two. That total of $160,000 does not recover the entire cost of the property so that none of the gain can be recognized. However, the interest revenue form the receivable does increase income. The payment at the end of the first year was $80,000 reducing the receivable from $480,000 down to $400,000. Based on a 10 percent rate, the interest revenue to be collected in Year Two is $40,000 ($400,000 times 10 percent). This amount is the only income effect for this year.
PLEASE HELP!
THANKS!