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 2020, Lake began operations and sold jet skis with a total price of $690,000 that cost Lake $345,000. Lake collected $230,000 in 2020, $230,000 in 2021, and $230,000 in 2022 associated with those sales. In 2021, Lake sold jet skis with a total price of $1,860,000 that cost Lake $1,116,000. Lake collected $620,000 in 2021, $430,000 in 2022, and $430,000 in 2023 associated with those sales. In 2023, Lake also repossessed $380,000 of jet skis that were sold in 2021. Those jet skis had a fair value of $142,500 at the time they were repossessed. In 2020, Lake would recognize realized gross profit of:

Answer 1

$115,000

Step-by-step explanation:

Calculation to determine what Lake would recognize realized gross profit

First step is to calculate the Gross profit percentage

Gross profit percentage = [($690,000 − $345,000)/$690,000]

Gross profit percentage =$345,000/$690,000

Gross profit percentage =0.5*100

Gross profit percentage = 50%

Now let calculate the realized gross profit

Realized gross profit=50% × $230,000

Realized gross profit = $115,000

Therefore Lake would recognize realized gross profit of:$115,000