Revenue recognition when collection is uncertain. Appliance Sales and Service sells major household appliances to customers, offering extended payment terms. Its fiscal year ends on June 30. In July of 2008, a customer bought a freezer, a refrigerator, and a convection oven on an installment plan, with no down payment and 10 monthly payments of $244, beginning July 31, 2008. The gross margin percentage on this arrangement is 9%. Appliance Sales and Service classifies Deferred Gross Margin as a liability on its balance sheet. Ignore any interest on unpaid accounts receivable.

a. Assume the customer makes all 10 payments. What journal entries will Appliance Sales and Service make (1) at the time of sale in June 2007, and (2) when it receives each monthly payment from the customer under each of the following methods of recognizing revenue:

(1) Installment method.

(2) Cost recovery method.

b. Assume the customer stops making payments after making the November 2008 payment. In December 2008, Appliance Sales and Service repossesses all three appliances and estimates that it could sell the repossessed appliances for $980. What journal entries would Appliance Sales and Services make under each of the following methods of recognizing revenue:

(1) Installment method.

(2) Cost recovery method.