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:

a. $300 gain.

b. $10,000 loss.

c. $9,800 loss.

d. $1,000 gain.

Answer 1

The correct answer is that there will be a loss on the repossession, calculated by finding the net book value of the repossessed item and comparing it to its estimated repossessed value. However, the loss amount calculated ($5,300) is not present in the given multiple-choice options.

Step-by-step explanation:

The question is asking to calculate the gain or loss on repossession of dining room sets sold by Oliver Co. using the installment-sales method when the company could no longer collect on an account with a balance of $14,000. Using the gross profit rate of 70%, we can determine the cost of the goods sold (COGS) and then compare this to the estimated net value of the repossessed dining room set to find out the gain or loss.

First, we calculate the COGS:

1. Gross Profit on sale = Gross Profit Rate × Sale Price
2. $14,000 × (1 - 0.70) = $4,200 (COGS)
3. Net book value of account (NBV) = Original account balance - COGS
4. $14,000 - $4,200 = $9,800 (NBV)

Comparison of NBV to repossessed value:

1. Repossessed value (without reconditioning) = $4,000
2. Loss on repossession = NBV - Repossessed value
3. $9,800 - $4,000 = $5,800 (Without reconditioning)
4. Repossessed value (with reconditioning) = $5,000 - $500 (Cost of reconditioning)
5. Loss on repossession (with reconditioning) = $9,800 - ($5,000 - $500)
6. $9,800 - $4,500 = $5,300

As the loss is lower with reconditioning, it is preferable. Thus the correct answer to the gain or loss on repossession is a loss of $5,300, which is not an option in the given choices, so there might be an error in the provided options or the calculations above.