You are internal auditor for Shannon Supplies, Incorporated, 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, 2024, are as follows: Assets Cash SHANNON SUPPLIES, INCORPORATED Balance Sheet December 31, 2024 ($ in thousands) Investment in equity securities Accounts receivable, net Inventory 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 $ 2,500 350 910 1,160 1,340 (460) $ 5,800 $ 3,370 370 300 850 910 $ 5.800
You are internal auditor for Shannon Supplies, Incorporated, 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, 2024, are as follows: Assets Cash SHANNON SUPPLIES, INCORPORATED Balance Sheet December 31, 2024 ($ in thousands) Investment in equity securities Accounts receivable, net Inventory 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 $ 2,500 350 910 1,160 1,340 (460) $ 5,800 $ 3,370 370 300 850 910 $ 5.800
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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
Transcribed Image Text:You are internal auditor for Shannon Supplies, Incorporated, 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, 2024, are as
follows:
Assets
Cash
SHANNON SUPPLIES, INCORPORATED
Balance Sheet
December 31, 2024
($ in thousands)
Investment in equity securities
Accounts receivable, net
Inventory
Equipment
Less: Accumulated depreciation
Total assets
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses
Income tax payable
Common stock, $1 par
Additional paid-in capital
Retained earnings
Total liabilities and shareholders' equity
Net income
SHANNON SUPPLIES, INCORPORATED
Income Statement
For the Year Ended December 31, 2024
($ in thousands)
Sales revenue
Operating expenses:
Cost of goods sold
Selling and administrative
Depreciation
Income before income tax
Income tax expense
$ 1,240
906
74
$ 3,700
2,220
$ 1,480
(370)
$ 1,110
$ 2,500
350
910
1,160
1,340
(460)
$ 5,800
$ 3,370
370
300
850
910
$ 5,800
Shannon's income tax rate was 25% in 2024 and previous years. During the course of the audit, the following additional information
(not considered when the above statements were prepared) was obtained:
a. 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 $190,000 were sold in May 2024. Shannon accountants debited cash and credited investment in
equity securities for the $240,000 proceeds of the sale.
b. At December 31, 2024, the fair value of the remaining equity securities in the investment portfolio was $379,000.
c. The state of Alabama filed suit against Shannon in October 2022, 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 2024, now believes eventual payment to the state of
$140,000 is probable, most likely to be paid in 2027.
d. The $1,160,000 inventory total, which was based on a physical count at December 31, 2024, was priced at cost. Based on your
conversations with company accountants, you determined that the inventory cost was overstated by $142,000.
e. A new tax law was enacted in 2024, which will cause Shannon's income tax rate to change from 25% to 20% beginning in 2025.
Required:
Prepare journal entries to record the effects on Shannon's accounting records at December 31, 2024, for each of the items described
above.

Transcribed Image Text:Required:
Prepare journal entries to record the effects on Shannon's accounting records at December 31, 2024, for each of the items described
above.
Note: 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.
No
1
2
3
4
LO
5
6
Transaction
a(1)
a(2)
b
C
d
e
X Answer is complete but not entirely correct.
Fair value adjustment
Gain on investments (NI)
Investment in equity securities
Fair value adjustment
Loss on investments (NI)
Fair value adjustment
Loss - litigation
Liability - litigation
Cost of goods sold
Inventory
General Journal
Deferred tax asset
Income tax payable
Income tax expense
Debit
50,000
50,000
21,000
140,000
142,000
35,000 X
0x
Credit
50,000
50,000
21,000
140,000
142,000
35,000
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