Spicer Corporation has a normal gross profit on installment sales of 30%. A 2013 sale resulted in a default early in 2015. At the date of default, the balance of the installment receivable was $32,000, and the repossessed merchandise had a fair value of $18,000. Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on repossession should be
A) $0.
B) a $4,400 loss.
C) a $4,400 gain.
D) a $10,000 loss.

Question

Quizplus · Accepted Answer

To find the gain or loss on repossession, we need to compare the gross profit percentage (30%) to the percentage of payments received (we don't know this percentage, but we can determine it by dividing the payments received by the total sales price).

Let's first determine the total sales price:
Sales price = installment receivable balance at default + gross profit
Sales price = $32,000 / 0.7 = $45,714.29

Now, let's determine the cost of the repossessed merchandise:
Cost = fair value of repossessed merchandise / (1 + gross profit percentage)
Cost = $18,000 / 1.3 = $13,846.15

Therefore, the loss on repossession is:

Loss on repossession = cost - installment receivable balance at default
Loss on repossession = $13,846.15 - $32,000 = -$18,153.85

This means there is a loss of $18,153.85 on the repossession, and the closest answer choice is B, a $4,400 loss. None of the answer choices are exact, so we would choose the closest one.

Spicer Corporation Has a Normal Gross Profit on Installment Sales