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 installment sales method for revenue recognition. 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 $1,710,000 that cost Lake $1,026,000. Lake collected $570,000 in 2018, $415,000 in 2019, and $415,000 in 2020 associated with those sales. In 2020, Lake also repossessed $310,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $116,250 at the time they were repossessed.

In its December 31, 2018, balance sheet, Lake would report:

Answer 1

Installment sales is a method of recognizing revenue when the cash is actually received, since there is a high risk involved in collection. Therefore each payment is divided between partial recovery of cost and gross profit, receivables are shown in balance sheet on net basis i.e. profit element is deducted from balance amount of receivables.

In 2017 profit involved is 50%(840000-420000/840000)

In 2018 profit involved is 40%(1710000-1026000/1710000)

2017 sales receivables outstanding in 2018 is 280000 less profit 140000 = net receivables140000

2018 sales receivables outstanding in 2018 is 1140000 less profit 456000 = net receivables 684000

So in 2018 balance sheet Net receivables to be shown in balance sheet will be $824000