Detailed Answer
Answer (C) is correct. The cost-recovery method recognizes profit only after collections exceed the cost of the item sold, that is, when the full cost has been recovered. Subsequent amounts collected are treated entirely as revenue (debit cash and deferred gross profit, credit the receivable and realized gross profit). The sum of collections in excess of costs to be recognized as gross profit is $5,000 {[$3,000 Year 8 collections on Year 7 sales – ($8,000 cost – $7,000 Year 7 collections on Year 7 sales)] + ($12,000 collections on Year 8 sales – $9,000 cost)}.