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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.

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