Question

1/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 2017, Lake began operations and sold jet skis with a total price of $780,000 that cost Lake $390,000. Lake collected $260,000 in 2017, $260,000 in 2018, and $260,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,380,000 that cost Lake $828,000. Lake collected $460,000 in 2018, $368,000 in 2019, and $368,000 in 2020 associated with those sales. In 2020, Lake also repossessed $184,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $69,000 at the time they were repossessed.

In 2019, Lake would recognize realized gross profit of:

Multiple Choice

• $260,000.

• $0.

• $420,000.

• $628,000.

2/ Johnson sells $112,000 of product to Robbins, and also purchases $12,400 of advertising services from Robbins. The advertising services have a fair value of $9,200. Johnson should record revenue on its sale of product to Robbins of:

Multiple Choice

• $99,600

• $102,800

• $108,800

• $112,000

3/ Video Planet (“VP”) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,280, sells the remote separately for $80, and offers the installation service separately for $240. The entire package sells for $1,500.

Required:
How much revenue would be allocated to the TV, the remote, and the installation service?

Item Description	Allocated Revenue
TV
Remote
Installation
Total revenue	$0

4/ Present and future value tables of $1 at 9% are presented below.

	PV of $1	FV of $1	PVA of $1	FVAD of $1	FVA of $1
1	0.91743	1.09000	0.91743	1.0900	1.0000
2	0.84168	1.18810	1.75911	2.2781	2.0900
3	0.77218	1.29503	2.53129	3.5731	3.2781
4	0.70843	1.41158	3.23972	4.9847	4.5731
5	0.64993	1.53862	3.88965	6.5233	5.9847
6	0.59627	1.67710	4.48592	8.2004	7.5233

   
Ajax Company purchased a one-year certificate of deposit for its building fund in the amount of $190,000. How much should the certificate of deposit be worth at the end of one years if interest is compounded at an annual rate of 9%?

Multiple Choice

• $205,841.

• $173,053.

• $207,100.

• $174,312.

Answer 1

Question 1:

Under Cost Recovery method , Revenue shall be recognized only after the cost portion of such Sales is recovered. In the given question, From the sales of 2017, Receipts in 2017 and 2018 realizes the cost of 3,90,000 ( 260000+130000). In 2018 , company would have recognized 130000( 260000-130000). So In 2019 , It can completely recognize the amount of receipts of 260000 as its cost element is already recovered. And with respect to sales in 2018 , its cost of 828000 can be recovered from receipts of 2018 and 2019 (460000+368000) and nothing more left from the receipts of 2019 to recognize as income for 2019. Events occurred in 2020 no way impacts the revenue recognition in 2019. So , total income that can be raised in 2019 is 260000 (from sales of 2017) . So answer is $ 260000

Question 2:

Revenue shall include not only the cash portion receivable , but also the impact of fair value difference in any other transactions occurred with the customer. So in this case revenue must be calculated after considering the purchase transaction with robbins. So Revenue = 120000 - ( 12400-9200) = 120000-3200 = $ 108800

Question 3:

Revenue should be recognized based on performance obligations. In this Case, TV , Remote and installation are different Performance obligations and shall be recognized seperately. So For TV: $1280 Remote: $80 and Installation $ 240. and Total Revenue is $ 1500.

Question 4:

Compounded Value of certificate which is compounding annually is the amount of investment multiplied by Future Value Factor ie., in the given case , $ 190000* 1.09 = $ 207100. So the worth of the certificate after 1 year interest compounded annually is $ 207100