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    Error corrections for Sherwood Real Estate Company

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    1. (E6-2)

    Errors in Financial Statements
    The following financial statements are available for SHERWOOD REAL ESTATE COMPANY:

    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 Stockholders' Equity
    Capital stock . . . . . . . . . . . $ 10,000
    Retained earnings . . . . . . . 5,071,300
    Total stockholders' equity . . 5,081,300
    Total liabilities and stock-
    Total assets . . . . . . . . . $11,181,300 holders' 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.

    Prepare financial statements for Sherwood Company showing what its total assets, liabilities, stockholders' equity, and income really are with the sale of real estate removed.

    © BrainMass Inc. brainmass.com April 3, 2020, 4:55 pm ad1c9bdddf
    https://brainmass.com/business/financial-accounting-bookkeeping/error-corrections-for-sherwood-real-estate-company-135471

    Solution Summary

    The problem presents a completed balance sheet and income statement which include the effects of a bogus transaction. The solution lays out the steps needed to reconstruct and repair the financial statements including the finished financial statements.

    $2.19

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