Question

Oliver Co. uses the installment-sales method to record the sale of dining room sets. When an account had a balance of $14,000, no further collections could be made and the dining room set was repossessed. At that time, it was estimated that the dining room set could be sold for $4,000 as repossessed, or for $5,000 if the company spent $500 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a:

Select one:
A. $9,800 loss
B. $10,000 loss
C. $1,000 gain
D. $300 gain.

Answer 1

The gain or loss on repossession is a $1,000 loss.

Step-by-step explanation:

The gain or loss on repossession can be calculated by comparing the amount that could be obtained by selling the repossessed item as is ($4,000) versus the amount that could be obtained after spending $500 on reconditioning ($5,000). The gross profit rate is given as 70%. To calculate the gain or loss, we can use the formula: Gain or Loss = (Sales Price * Gross Profit Rate) - Cost.

Using this formula, we can calculate the gain or loss on repossession as follows:

Gain or Loss = (5000 * 0.7) - (4000 + 500) = 3500 - 4500 = -1000.

Therefore, the gain or loss on repossession is a $1,000 loss.