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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 are as follows:
SHANNON SUPPLIES, INCORPORATED
Balance Sheet
December
$ in thousands
Assets
Cash $
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, $ par
Additional paidin capital
Retained earnings
Total liabilities and shareholders equity $
SHANNON SUPPLIES, INCORPORATED
Income Statement
For the Year Ended December
$ in thousands
Sales revenue $
Operating expenses:
Cost of goods sold $
Selling and administrative
Depreciation
Income before income tax $
Income tax expense
Net income $
Shannons income tax rate was in 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 longterm appreciation. To raise working capital, some of the shares with an original cost of $ were sold in May Shannon accountants debited cash and credited investment in equity securities for the $ proceeds of the sale.
At December the fair value of the remaining equity securities in the investment portfolio was $
The state of Alabama filed suit against Shannon in October 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 now believes eventual payment to the state of $ is probable, most likely to be paid in
The $ inventory total, which was based on a physical count at December was priced at cost Based on your conversations with company accountants, you determined that the inventory cost was overstated by $
Electronic counters costing $ were added to the equipment on December The cost was charged to repairs.
Shannons equipment, on which the counters were installed, had a remaining useful life of four years on December and is being depreciated by the straightline method for both financial and tax reporting.
A new tax law was enacted in which will cause Shannons income tax rate to change from to beginning in
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