Question

Fryman Furniture uses the installment-sales method. No further collections could be made on an account with a balance of $24,000. It was estimated that the repossessed furniture could be sold as is for $7,200, or for $8,400 if $400 were spent reconditioning it. The gross profit rate on the original sale was 40%. The loss on repossession was:

a. $16,800.

b. $6,000.

c. $16,000.

d. $6,400

Answer 1

The loss on repossession for Fryman Furniture using the installment-sales method with a gross profit rate of 40% and a repossessed furniture resale value of either $7,200 as is or $8,400 with reconditioning (less $400 reconditioning costs) is $6,400.

Step-by-step explanation:

To calculate the loss on repossession for Fryman Furniture using the installment-sales method, we consider the gross profit rate and the remaining balance on the repossessed item. The gross profit on the original sale was 40%, which means the cost of the goods sold was 60% of the sales price.

With an account balance of $24,000, the cost associated with this balance is 60%, or $14,400. If the repossessed furniture is sold as is for $7,200, the loss on repossession would be the cost ($14,400) minus the resale value ($7,200), resulting in a loss of $7,200.

However, if $400 is spent reconditioning it, and it's sold for $8,400, the net proceeds will be $8,000 ($8,400 - $400), which leads to a loss of $6,400 ($14,400 - $8,000).