On October 1, 2011, the Marshall Company sold a large piece of machinery to the Hammond Construction Company for $80,000. The cost of the machine was $40,000. Hammond made a down payment of $10,000 and agreed to pay the remaining balance in seven equal monthly installments of $10,000, plus interest at 12% on the unpaid balance, beginning November 1.
1. Identify three alternative methods for recognizing revenue and costs for the situation described and compute the amount of gross profit that would be recognized in 2011 using each method.
2. Discuss the circumstances under which each of the three methods would be used.