Effect of recording errors on the balance sheet equation. Using the notation O/S (overstated), U/S (understated), or No (no effect), indicate the effects on assets, liabilities, and shareholders' equity of failing to record each of the following independent transactions or events. For example, a failure to record the issuance of common stock for \(\$ 10,000\) cash would be shown as follows:

- Assets-U/S \(\$ 10,000\)

■ Liabilities-No

- Shareholders' Equity-U/S \(\$ 10,000\)

(1) A firm acquires a building costing \(\$ 800,000\) by paying \(\$ 40,000\) in cash and signing a 20 -year mortgage for the balance of the purchase price.

(2) A firm returns defective merchandise to a supplier and receives a cash refund of the \(\$ 800\) purchase price.

(3) A firm places an order for a machine costing \(\$ 3,500\). Payment is due on delivery of the machine next month.

(4) Holders of a firm's bonds originally issued for their principal amount of \(\$ 10,000\) exchange these bonds for common stock of the firm valued at \(\$ 10,000\). Consider this transaction from the viewpoint of the firm exchanging its common stock for the bonds.

(5) A firm issues a check for \(\$ 900\) for insurance coverage on automobiles for the next three months.

(6) A firm receives notice that it is a defendant in a lawsuit by a customer who is suing for damages of \(\$ 250,000\). The lawsuit is scheduled for trial in nine months.

(7) A firm purchases, for \(\$ 2,000\), shares of its outstanding common stock held by a shareholder.

(8) A firm pays accounts payable recorded on the books for \(\$ 3,000\) in time to take advantage of a 2-percent discount for prompt payment.