Question: You are internal auditor for Shannon Supplies,
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, 2021, are as follows:
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:
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 $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.
b. At December 31, 2021, the fair value of the remaining equity securities in the investment portfolio was $274,000.
c. 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.
d. 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.
e. Electronic counters costing $80,000 were added to the equipment on December 29, 2020. The cost was charged to repairs.
f. 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.
g. 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.
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