Lake Power Sports sells jet skis and other powered recreational equipment. Custo
ID: 2335256 • 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 $750,000 that cost Lake $375,000. Lake collected $250,000 in 2017, $250,000 in 2018, and $250,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,920,000 that cost Lake $1,152,000. Lake collected $640,000 in 2018, $512,000 in 2019, and $512,000 in 2020 associated with those sales. In 2020, Lake also repossessed $256,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $96,000 at the time they were repossessed. In 2019, Lake would recognize realized gross profit of:
Explanation / Answer
Total Price = $750000
Cost = $375000
Lake Collected in 2017 = $250000
in 2018 = $250000
in 2019 = $250000
So total Cost of $375000 is Covered in the year 2017 and 2018.
Amount received in the year 2019 is part of Profit = $250000
Total Price = $1920000
Cost = $1152000
Lake Collected in 2018= $640000
in 2019 = $512000
in 2020 = $512000
So total Cost of $1152000 is Covered in the year 2018 and 2019.
Amount received in the year 2019 is part of Profit = $1152000-$640000-$512000 = $0
Total Recognize Realized Gross Profit = $250000 + $0 = $250000
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