Lake Power Sports sells jet skis and other powered recreational equipment. Custo
ID: 2335253 • Letter: L
Question
Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2017, Lake began operations and sold jet skis with a total price of $720,000 that cost Lake $360,000. Lake collected $240,000 in 2017, $240,000 in 2018, and $240,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,320,000 that cost Lake $792,000. Lake collected $440,000 in 2018, $310,000 in 2019, and $310,000 in 2020 associated with those sales. In 2020, Lake also repossessed $260,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $97,500 at the time they were repossessed. In 2017, Lake would recognize realized gross profit of:
Explanation / Answer
Amount to be recognised as gross profit in 2017 :-
Sales in 2017 = $720,000
Cost of sales in 2017 = $360,000
Gross profit = $720000 - $360000 = $360,000.
Amount received in 2017 from sales of 2017 = $240000
Gross profit to be recognised in 2017 = $240,000 / $720,000 * $360,000 = $120,000
Gross profit ratio = 50%.
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