Question

You are internal auditor for Shannon Supplies, Inc., and are reviewing the company's preliminary financial statements. The statements, prepared after making the adjusting entries, but before closing entries for the year ended December 31, 2018, are as follows: SHANNON SUPPLIES, INC. Balance Sheet December 31, 2018 ($ in 000s) Assets Cash Investments Accounts receivable, net Inventory Property, plant, and equipment Less: Accumulated depreciation Total assets Liabilities and shareholders' Equity Accounts payable and accrued expenses Income tax payable Common stock, $1 par Additional paid-in capital Retained earnings Total liabilities and shareholders' equity $2,330 215 740 990 1,170 (630) $4, 815 $3,250 150 130 680 605 $4,815 $3,260 SHANNON SUPPLIES, INC. Income Statement For the Year Ended December 31, 2018 ($ in 0003) Sales revenue Operating expenses: Cost of goods sold $1,070 Selling and administrative 889 Depreciation 91 Income before income tax Income tax expense Net income 2,050 $1,210 (484) $ 726

Answer 1

A 1 Date 2 a 4 10 11 12 C Particulars Debit ($) Credit ($) Investments (206000-173000) 33000 Gain on sale of investments 33000 Unrealized loss - OCI 12500 Fair value adjustment (calculated below) 12500 Fair value adjustment calculation: Investment balance, as reported 215000 Error adjustment 33000 Corrected balance, 12/31/2018 248000 Fair value, 12/31/2018 -235500 Fair value adjustment needed 12/31/2018 12500 Loss-lawsuit 123000 Liability-lawsuit 123000 Cost of goods sold 125000 Inventory 125000 Property, plant, and equipment (amount expensed in erra 73000 Income tax payable (73000*40%) 29200 retained earnings (to balance) 43800 Depreciation expense (73000/4 years) 18250 Accumulated depreciation 18250 Deferred tax asset (calculated below*) 47425 Income tax payable (to balance) 44075 Income tax expense (calculated below**) 91500 13 14 15 16 17 18 19 20 21 22 23

12100001 33000 -125000 -182501 10997501 0.4 439900 Income taxes: Taxable income (same as pretax accounting income before temporary defferences), as reported Add: realized gain on sale of investments (a) Less: Inventory overstatement (d) Less: Additional depreciation on equipment (f) Taxable income, as adjusted Tax rate Income tax payable Future deductible amounts (not included in taxable income) Lawsuit expected to be settled in 2021 (c.) Unrealized loss on investment (b) Total future deductible amounts Tax rate effective after 2018 *Deferred tax asset Income tax expense, as adjusted **Income tax expense, as reported Income tax expense, as adjusted Reduction in income tax expense 1230001 12500 135500 0.35) -47425 3925001 484000 -392500 91500