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 2017, Lake began operations and sold jet skis with a total price of $840,000 that cost Lake $420,000. Lake collected $280,000 in 2017, $280,000 in 2018, and $280,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $2,070,000 that cost Lake $1,242,000. Lake collected $690,000 in 2018, $552,000 in 2019, and $552,000 in 2020 associated with those sales. In 2020, Lake also repossessed $276,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $103,500 at the time they were repossessed.

In 2019, Lake would recognize realized gross profit of:

Multiple Choice

$280,000.

$0.

$832,000.

$420,000.

Answer 1

Answer :

In 2019, Lake would recognize Realized Gross Profit of $ 280,000 under cost recovery method.

Working Notes -

1. As per the cost recovery method no profit or gain on sales is recognized until the cost of the goods sold is completely realized in cash.

2. Details of Sales made by Lake Power Sports:

Year	Sales	Cost
2017	$ 840,000	$ 420,000
2018	$ 2,070,000	$ 1,242,000

3. Computation of Profits realized:

Cost of goods sold	Collection (Year)	Amount ($)	Cost ($)	Profit ($)
$ 420,000 (2017)	2017	280,000	280,000	-
	2018	280,000	140,000	140,000
	2019	280,000	-	280,000
	Total	$840,000	$420,000	$420,000
$1,242,000 (2018)	2018	690,000	690,000	-
	2019	552,000	552,000	-
	2020**	552,000	-	552,000
	Total	$1,794,000	$1,242,000	$552,000

** In 2020, lake repossessed goods of $ 276,000 of 2018 sales ( will not effect profit of 2019 as repossession made only in 2020).

Gross Profits realized in 2019 =

Profits realized from 2017 sales + Profits realized from 2018 sales = $ 280,000 + 0 = $ 280,000