The Alliance Corporation Introduced a New Line of Product the Profitability

question 10

Essay

The Alliance Corporation introduced a new line of product the profitability of which is quite uncertain.This uncertainty has resulted in Alliance choosing to use the cost recovery method to account for this product.
The following information relating to the new product line is available for the year 2014:

Required:
1.Explain the general approach of the cost recovery method and when it should be used.
2.Record the journal entries for the new product for 2014 and 2015 based on the information given above.
3.How and in what amount would the deferred gross margin be presented on the balance sheet of Alliance at December 31,2014?
4.How does the cost recovery method differ from the installment sales method?

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Definitions:

Board of Directors

A group of individuals elected to represent shareholders and govern over the activities and decisions of a corporation or organization.

Cost Method

an accounting technique used for recording investments in subsidiary companies where the investment is recorded at cost and adjusted only for dividends received.

Consolidated Financial Statements

Financial statements that aggregate the financial position and results of operations of a parent company and its subsidiaries.

Direct Approach

A communication or problem-solving strategy that deals with issues in a straightforward and clear manner.