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 installment sales method for revenue recognition. In 2017, Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2017, $300,000 in 2018, and $300,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2018, $400,000 in 2019, and $400,000 in 2020 associated with those sales. In 2020, Lake also repossessed $200,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $75,000 at the time they were repossessed.
- In 2019, Lake would recognize realized gross profit of:

Question

Quizplus · Accepted Answer

2017 sales:
Gross profit % = ($900,000 - $450,000)/$900,000 = 50%
50% × $300,000 received in 2019 = $150,000
2018 sales:
Gross profit % = ($1,500,000 - $900,000)/$1,500,000 = 40%
40% × $400,000 received in 2019 = $160,000
Total: $150,000 + $160,000 = $310,000

Lake Power Sports Sells Jet Skis and Other Powered Recreational