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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,

You are internal auditor for Shannon Supplies, Incorporated, and are reviewing the companys 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:
SHANNON SUPPLIES, INCORPORATED
Balance Sheet
December 31,2024
($ in thousands)
Assets
Cash $ 2,420
Investment in equity securities 270
Accounts receivable, net 830
Inventory 1,080
Equipment 1,260
Less: Accumulated depreciation (540)
Total assets $ 5,320
Liabilities and Shareholders Equity
Accounts payable and accrued expenses $ 3,340
Income tax payable 240
Common stock, $1 par 220
Additional paid-in capital 770
Retained earnings 750
Total liabilities and shareholders equity $ 5,320
SHANNON SUPPLIES, INCORPORATED
Income Statement
For the Year Ended December 31,2024
($ in thousands)
Sales revenue $ 3,460
Operating expenses:
Cost of goods sold $ 1,160
Selling and administrative 898
Depreciation 822,140
Income before income tax $ 1,320
Income tax expense (330)
Net income $ 990
Shannons 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:
Shannons 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 $182,000 were sold in May 2024. Shannon accountants debited cash and credited investment in equity securities for the $224,000 proceeds of the sale.
At December 31,2024, the fair value of the remaining equity securities in the investment portfolio was $295,000.
The state of Alabama filed suit against Shannon in October 2022, seeking civil penalties and injunctive relief for violations of environmental regulations regulating emissions. Shannons 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 $132,000 is probable, most likely to be paid in 2027.
The $1,080,000 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 $134,000.
Electronic counters costing $84,000 were added to the equipment on December 29,2023. The cost was charged to repairs.
Shannons equipment, on which the counters were installed, had a remaining useful life of four years on December 29,2023, and is being depreciated by the straight-line method for both financial and tax reporting.
A new tax law was enacted in 2024, which will cause Shannons income tax rate to change from 25% to 20% beginning in 2025.
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