Sherwood Real Estate - errors in financial statements
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Balance Sheet
Assets Liabilities
Cash . . . . . . . . . . . . . . $ 1,300 Accounts payable . . . . . . . . $ 100,000
Receivable from sale . . Mortgage payable . . . . . . . 6,000,000
of real estate . . . . . . 5,000,000 Total liabilities . . . . . . . . . . $ 6,100,000
Interest receivable* . . . 180,000
Real estate properties . 6,000,000
Total assets . . . . . . . . $11,181,300
Stockholders' Equity
Capital stock . . . . . . . . . . . $ 10,000
Retained earnings . . . . . . 5,071,300
Total stockholders' equity . . 5,081,300
Total liabilities and stockholders' equity . . . . . . . . $11,181,300
*Interest Receivable applies to Receivable from sale of real estate.
Income Statement
Gain on sale of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,200,000
Interest income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,380,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,180,000
*Interest Income applies to Receivable from sale of real estate.
Sherwood Company is using these financial statements to entice investors to buy stock in the company. However, a recent FBI investigation revealed that the sale of real estate was a fabricated transaction with a fictitious company that was recorded to make the financial statements look better. The sales price was $5,000,000 with a zero cash down payment and a $5,000,000 receivable. Pre pare financial statements for Sherwood Company showing what its total assets, liabilities, stockholders' equity, and income really are with the sale of real estate removed.
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Solution Summary
The solution in Excel presents a schedule to analyze the errors in the financial statements of Sherwood Real Estate Company. Beginning with a trial balance, correcting entries are prepared and posted for an adjusted trial balance. Using the adjusted trial balance, financial statements are compiled in good form.
Solution Preview
The entire solution including journal entries is shown in the attached Excel. The schedule to analyze the errors in the financial statements does not translate well to this format, and is not included below.
Adjusting Entries Debit Credit
Gain on sale 5,000,000 ...
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