Reference no: EM132032829

Problem 1 - Pinkerton Energy Company builds specially designed blades for generators used in wind energy farming operations. The company started the year with the following accounts receivable position:

Accounts receivable $ 10,500,000

Less: Allowance for uncollectibles (320,500)

$ 10,179,500

During the year, a customer, Black Point Power Company, was devastated by an unusually severe storm. At that time, Pinkerton concluded that it was highly unlikely that Black Point would ever be able to pay its outstanding balance of $150,000. This account was written off against the allowance account. Much later in the year, Black Point was rescued by a group of investors who offered to pay $90,000 toward the unpaid balance, provided Pinkerton would permanently forgive the other $60,000 and resume selling product to Black Point. Pinkerton agreed, and has since resumed doing business with Black Point.

During the year, sales on account amounted to $25,689,000. Collections on account totaled $21,300,500 (excluding the Black Point collection).

During the year, accounts written-off (not including the Black Point transaction) were $123,000. At year's end, a detailed analysis of accounts receivable was performed, and it was concluded that the allowance account should contain a balance of $475,000.

(a) Prepare summary journal entries:

To record the write-off of the Black Point receivable

To restore the portion of the Black Point receivable that was collected

To record the collection of the Black Point receivable

To record sales on account

To record collections on account

To record the write-off of accounts

To establish the correct balance in the allowance for uncollectibles

Problem 2 - Blue Star Corporation is a newly formed entity that engages in the purchase and resale of amphibious tour vehicles. Purchases for the first year of operation were as follows:

Date - Purchases

7-Jan - 50 units @ $15,000 each

15-Mar - 70 units @ $16,000 each

16-Jun - 30 units @ $16,500 each

3-Aug - 90 units @ $17,000 each

11-Oct - 25 units @ $17,200 each

Sales for this first year of operation amounted to 210 units and totaled $4,250,000.

(a) If Blue Star uses the first-in, first-out (FIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?

(b) If Blue Star uses the last-in, first-out (LIFO) inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?

(c) If Blue Star uses the weighted-average inventory method (periodic approach), what values would be assigned to ending inventory and cost of goods sold? How much is gross profit?

(d) Which of the above techniques produces the highest profit? Which of the above techniques reports the most "current" cost on a balance sheet? Which of the above techniques report the most "current" cost in measuring income? Which of the above techniques results in the lowest income tax obligation?