Homework Assignment #3 – Due November 8, 2015

Problem 1 (40 points)

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 (60 points)

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?