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	$	2,370
Investments		235
Accounts receivable, net		780
Inventory		1,030
Property, plant, and equipment		1,210
Less: Accumulated depreciation		(590	)
Total assets	$	5,035
Liabilities and Shareholders’ Equity
Accounts payable and accrued expenses	$	3,290
Income tax payable		190
Common stock, $1 par		170
Additional paid-in capital		720
Retained earnings		665
Total liabilities and shareholders’ equity	$	5,035

SHANNON SUPPLIES, INC. Income Statement For the Year Ended December 31, 2018 ($ in 000s)
Sales revenue				$	3,340
Operating expenses:
Cost of goods sold	$	1,110
Selling and administrative		893
Depreciation		87			2,090
Income before income tax				$	1,250
Income tax expense					(500	)
Net income				$	750

Shannon’s income tax rate was 40% in 2018 and previous years. During the course of the audit, the following additional information (not considered when the above statements were prepared) was obtained:

1. Shannon’s investment portfolio consists of blue chip stocks held for long-term appreciation. To raise working capital, some of the shares with an original cost of $177,000 were sold in May 2018. Shannon accountants debited cash and credited investments for the $214,000 proceeds of the sale.
2. At December 31, 2018, the fair value of the remaining securities in the portfolio was $257,500.
3. The state of Alabama filed suit against Shannon in October 2016, seeking civil penalties and injunctive relief for violations of environmental regulations regulating emissions. Shannon’s legal counsel previously believed that an unfavorable outcome was not probable, but based on negotiations with state attorneys in 2018, now believe eventual payment to the state of $127,000 is probable, most likely to be paid in 2021.
4. The $1,030,000 inventory total, which was based on a physical count at December 31, 2018, was priced at cost. Based on your conversations with company accountants, you determined that the inventory cost was overstated by $129,000.
5. Electronic counters costing $77,000 were added to the equipment on December 29, 2017. The cost was charged to repairs.
6. Shannon’s equipment, on which the counters were installed, had a remaining useful life of four years on December 29, 2017, and is being depreciated by the straight-line method for both financial and tax reporting.
7. A new tax law was enacted in 2018 which will cause Shannon’s income tax rate to change from 40% to 35% beginning in 2019.

Required:
Prepare journal entries to record the effects on Shannon’s accounting records at December 31, 2018, for each of the items described above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars not in thousands of dollars.)

View transaction list Journal entry worksheet 3 4 5 6 7 Record correct investment account. Note: Enter debits before credits Transaction General Journal Debit Credit Record entry Clear entry View general journal

• 1. Record correct investment account.

• 2. Record the fair value adjustment.

• 3. Record the loss-lawsuit.

• 4. Record correction of inventory error.

• 5. Record correct assets that were incorrectly expensed.

• 6. Record the 2018 adjusting entry for depreciation.

• 7. Record the income tax expense.

Answer 1

Answers Page No 0 Towind catuies who record ebbecks on shampons accounting records To record correct investment account Investment - 214000 – 177000 = $34000 @ To record the fair value adjustment Investment balance = $235000 eviour adjustment = $37000 Coorrected balance on tal31) 18 - 235000 + 37000 : 242000 fair value. on 10/31/18 = $254,500 fair value adjustment needed on 12/31118 = 240000 – 25 4500 =$14500 To record loss - lawsuit Kossa Lawsuit = $124000

© To record correction of inventory error Page. No inventory = $109000 To record correct assets that were incorrectly expensed Income tax payable = $77000 X 40% - $30800 Rebained earnings = 44000 - 30800 = $46200 to record 2018 adjunting entry for depreciation Depreciation expense = - ense 77000 $19250 .. 4 years To record income taxe expense Taxable Pocome = $1,950,000 Realized gain on sale of investment = $34000 O alion expense © Inventory, overstatement - $ 129000 Additional depreciation on equipment = $19250 Taxable income = 1250,000 + 37000 - 129000 –19250 $1138750

lag Income dax payable = 40%.X 1138750 = $455500 Lawsuit expected to be settled in 2001 = $124000 unrealized loss on investment = $14500 Total folüre deductible amounts = 127000 + 14500 = $141500 357 X 141500 ve effective color 2018 = ... - $ 49525 Income tax expense, as adjusted = $455500 – 49525 = 405975 Income tax expense , as reported =$500,000 Reduction is income tax expense < 500,000 – 405975 = $94025

Page. No 4 Debit $37000 $34000 1 @ I $14500 $14500 $194000 $127000 Particular Investments Gain on sale of investments Unrealized (ons-ocÎ fair value adjustment Loss - Lawsuit Liabililo - lawsuit Coot of goods sold Inventory Property , plant & equipment Income tax payable Retained earnings Depreciation expense Accumulated depreciation $129000 $129000 o $ 30800 $ 46200 $19050 $19250 Deberred tax asset Income tax payable Income tax expense $49525 $ 44 500 $ 94025