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) $9,800 loss.
B) $10,000 loss.
C) $1,000 gain.
D) $300 gain.

Question

Quizplus · Accepted Answer

The gain or loss on repossession is calculated by comparing the fair value of the repossessed asset to the carrying amount of the installment receivable, adjusted for the cost of reconditioning and the gross profit rate. The carrying amount of the receivable is the original balance minus the gross profit. With a gross profit rate of 70%, the cost portion is 30%. Thus, the cost portion of the $14,000 balance is 30% of $14,000 = $4,200. Spending $500 on reconditioning to sell it for $5,000, the net realizable value is $4,500. The gain is $4,500 - $4,200 = $300.

Oliver Co Uses the Installment-Sales Method to Record the Sale of of Dining