Question:
Mulcahey Builders (MB) remodels office buildings in low-income urban areas that are undergoing
economic revitalization. MB typically accepts a 25% down payment when they complete a job and a note
which requires that the remainder be paid in three equal installments over the next three years, plus
interest. Because of the inherent uncertainty associated with receiving these payments, MB has
historically used the cost recovery method to recognize revenue.
As of January 1, 2013, MB’s outstanding gross installment account receivable (not net of deferred
grossprofit) consist of the following: 1$400,000 due from the Bluebird Motel. MB completed the
Bluebird job in 2011, and estimated gross profit on that job is 25%.2. $150,000 due from the PitStop
Gasand MiniMart. MB completed the PitStop job in 2010, and estimated gross profit on that job is 35%.
Dan Mulcahey has been considering switching from the cost recovery method to the installment sales
method, because he wants to show the highest possible gross profit in 2013 and he understands that the
installment sales method recognizes gross profit sooner than does the cost recovery method.
Required:
1. Calculate how much gross profit is expected to be earned on these jobs in 2013 under the cost recovery
method, and how much would be earned if MB instead used the installment sales method. Ignore interest.
2. If Dan is primarily concerned about 2013, do you think he would be happy with a switch to the
installmentsales method? Explain.
Answer:
Requirement 1
All jobs consist of four equal payments: one payment when the job is completed and three payments over
the next three years.
Mulcahey Builders (MB) remodels office buildings in low-income urban areas that are undergoing
economic revitalization. MB typically accepts a 25% down payment when they complete a job and a note
which requires that the remainder be paid in three equal installments over the next three years, plus
interest. Because of the inherent uncertainty associated with receiving these payments, MB has
historically used the cost recovery method to recognize revenue.
As of January 1, 2013, MB’s outstanding gross installment account receivable (not net of deferred
grossprofit) consist of the following: 1$400,000 due from the Bluebird Motel. MB completed the
Bluebird job in 2011, and estimated gross profit on that job is 25%.2. $150,000 due from the PitStop
Gasand MiniMart. MB completed the PitStop job in 2010, and estimated gross profit on that job is 35%.
Dan Mulcahey has been considering switching from the cost recovery method to the installment sales
method, because he wants to show the highest possible gross profit in 2013 and he understands that the
installment sales method recognizes gross profit sooner than does the cost recovery method.
Required:
1. Calculate how much gross profit is expected to be earned on these jobs in 2013 under the cost recovery
method, and how much would be earned if MB instead used the installment sales method. Ignore interest.
2. If Dan is primarily concerned about 2013, do you think he would be happy with a switch to the
installmentsales method? Explain.
Answer:
Requirement 1
All jobs consist of four equal payments: one payment when the job is completed and three payments over
the next three years.
