You are an 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, 2021, are as follows: SHANNON SUPPLIES, INC. Balance Sheet December 31, 2021 ($ in thousands) Assets       Cash $ 2,400     Investment in equity securities   250     Accounts receivable, net   810     Inventory   1,060     Equipment   1,240     Less: Accumulated depreciation   (560 )   Total assets $ 5,200     Liabilities and Shareholders’ Equity         Accounts payable and accrued expenses $ 3,320     Income tax payable   220     Common stock, $1 par   200     Additional paid-in capital   750     Retained earnings   710     Total liabilities and shareholders’ equity $ 5,200         SHANNON SUPPLIES, INC. Income Statement For the Year Ended December 31, 2021 ($ in thousands) Sales revenue       $ 3,400     Operating expenses:               Cost of goods sold $ 1,140           Selling and administrative   896           Depreciation   84     2,120     Income before income tax       $ 1,280     Income tax expense         (320 )   Net income       $ 960       Shannon’s income tax rate was 25% in 2021 and previous years. During the course of the audit, the following additional information (not considered when the above statements were prepared) was obtained: 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 $180,000 were sold in May 2021. Shannon accountants debited cash and credited investment in equity securities for the $220,000 proceeds of the sale. At December 31, 2021, the fair value of the remaining equity securities in the investment portfolio was $274,000. The state of Alabama filed suit against Shannon in October 2019, seeking civil penalties and injunctive relief for violations of environmental regulations regulating emissions. Shannon’s legal counsel previously believed that an unfavorable outcome of this litigation was not probable, but based on negotiations with state attorneys in 2021, now believes eventual payment to the state of $130,000 is probable, most likely to be paid in 2024. The $1,060,000 inventory total, which was based on a physical count at December 31, 2021, was priced at cost. Based on your conversations with company accountants, you determined that the inventory cost was overstated by $132,000. Electronic counters costing $80,000 were added to the equipment on December 29, 2020. The cost was charged to repairs. Shannon’s equipment, on which the counters were installed, had a remaining useful life of four years on December 29, 2020, and is being depreciated by the straight-line method for both financial and tax reporting. A new tax law was enacted in 2021 which will cause Shannon’s income tax rate to change from 25% to 20% beginning in 2022. Required: Prepare journal entries to record the effects on Shannon’s accounting records at December 31, 2021, 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.)

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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You are an 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, 2021, are as follows:

SHANNON SUPPLIES, INC.
Balance Sheet
December 31, 2021
($ in thousands)
Assets      
Cash $ 2,400    
Investment in equity securities   250    
Accounts receivable, net   810    
Inventory   1,060    
Equipment   1,240    
Less: Accumulated depreciation   (560 )  
Total assets $ 5,200    
Liabilities and Shareholders’ Equity        
Accounts payable and accrued expenses $ 3,320    
Income tax payable   220    
Common stock, $1 par   200    
Additional paid-in capital   750    
Retained earnings   710    
Total liabilities and shareholders’ equity $ 5,200    
 

 

SHANNON SUPPLIES, INC.
Income Statement
For the Year Ended December 31, 2021
($ in thousands)
Sales revenue       $ 3,400    
Operating expenses:              
Cost of goods sold $ 1,140          
Selling and administrative   896          
Depreciation   84     2,120    
Income before income tax       $ 1,280    
Income tax expense         (320 )  
Net income       $ 960    
 


Shannon’s income tax rate was 25% in 2021 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 $180,000 were sold in May 2021. Shannon accountants debited cash and credited investment in equity securities for the $220,000 proceeds of the sale.
  2. At December 31, 2021, the fair value of the remaining equity securities in the investment portfolio was $274,000.
  3. The state of Alabama filed suit against Shannon in October 2019, seeking civil penalties and injunctive relief for violations of environmental regulations regulating emissions. Shannon’s legal counsel previously believed that an unfavorable outcome of this litigation was not probable, but based on negotiations with state attorneys in 2021, now believes eventual payment to the state of $130,000 is probable, most likely to be paid in 2024.
  4. The $1,060,000 inventory total, which was based on a physical count at December 31, 2021, was priced at cost. Based on your conversations with company accountants, you determined that the inventory cost was overstated by $132,000.
  5. Electronic counters costing $80,000 were added to the equipment on December 29, 2020. 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, 2020, and is being depreciated by the straight-line method for both financial and tax reporting.
  7. A new tax law was enacted in 2021 which will cause Shannon’s income tax rate to change from 25% to 20% beginning in 2022.


Required:
Prepare journal entries to record the effects on Shannon’s accounting records at December 31, 2021, 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.)

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