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Lake Power Sports sells jet skis and other powered ...

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2010 Lake began operations and sold jet skis with a total price of $1,170,000 that cost Lake $585,000. Lake collected $390,000 in 2010, $390,000 in 2011, and $390,000 in 2012 associated with those sales. In 2011 Lake sold jet skis with a total price of $1,740,000 that cost Lake $1,044,000. Lake collected $580,000 in 2011, $495,000 in 2012, and $495,000 in 2013 associated with those sales. In 2013 Lake also repossessed $170,000 of jet skis that were sold in 2011. Those jet skis had a fair value of $63,750 at the time they were repossessed.

In 2012, Lake would recognize realized gross profit of:

a $ 0.

b $760,000.

c $585,000.

d $393,000.

Solution Summary

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2010 Lake began operations and sold jet skis with a total price of $1,170,000 that cost Lake $585,000. Lake collected $390,000 in 2010, $390,000 in 2011, and $390,000 in 2012 associated with those sales. In 2011 Lake sold jet skis with a total price of $1,740,000 that cost Lake $1,044,000. Lake collected $580,000 in 2011, $495,000 in 2012, and $495,000 in 2013 associated with those sales. In 2013 Lake also repossessed $170,000 of jet skis that were sold in 2011. Those jet skis had a fair value of $63,750 at the time they were repossessed.

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