Explore BrainMass
Share

Error corrections for Sherwood Real Estate Company

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 June 21, 2018, 12:34 am ad1c9bdddf

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