Question

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2010 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2010, $300,000 in 2011, and $300,000 in 2012 associated with those sales. In 2011 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2011, $400,000 in 2012, and $400,000 in 2013 associated with those sales. In 2013 Lake also repossessed $200,000 of jet skis that were sold in 2011. Those jet skis had a fair value of $75,000 at the time they were repossessed.

1) In 2010, Lake would recognize realized gross profit of:______.
a) $0.
b) $450,000.
c) $300,000.
d) $150,000
2) In 2012, Lake would recgonize a realized gross profit of:_______.
a) $700,000.
b) $310,000.
c) $450,000.
d) $0
3) In 2013, Lake would record a lost on repossessions of:______.
a) $80,000.
b) $45,000.
c) $200,000.
d) $120,000.
4) In its December 31, 2011, balance sheet, Lake would report:_______.
a) deferred gross profit of $700,000.
b) installement receivables (net) of $900,000.
c) installment receivables (net) of $750,000.
d) deferred gross profit of $1,500,000.

Answer 1

1) In 2010, Lake would recognize realized gross profit of:______.

a) $0.

Revenue for calculating gross profit is only recognized when the cost of goods sold (COGS) has been fully recovered.

2) In 2012, Lake would recognize a realized gross profit of:_______.

c) $450,000.

gross profit related to 2010 sales = $900,000 - $450,000 (remaining COGS) = $450,000

gross profit related to 2011 sales = $900,000 - $900,000 = $0

3) In 2013, Lake would record a lost on repossessions of:______.

c) $200,000.

4) In its December 31, 2011, balance sheet, Lake would report:_______.

b) installment receivables (net) of $900,000.

total installments receivables = $300,000 + $1,000,000 = $1,300,000

remaining COGS from 2011 sales = $400,000

installment receivables (net) = $1,300,000 - $400,000 = $900,000