Effect of errors on financial statements. Using the notation O/S (overstated), U/S (understated), or NO (no effect), indicate the effects on assets, liabilities, shareholders" equity, and net income of each of the independent errors that follow. Ignore income tax effects.

a. In applying the market value method to minority, passive investments in securities, a firm incorrectly credits dividends received to the investment account.

b. The market value of minority, passive investments in securities at the end of a firm's first year of operations was $5,000 less than cost. The firm neglected to make the required journal entry in applying the market value method.

c. In applying the equity method, P correctly accrues its share of S's net income for the year. However, when receiving a dividend, P credits Dividend Revenue.

d. P acquired 30 percent of S on January 1 of the current year for an amount in excess of the book value of S's net assets. The excess relates to patents. P correctly accounted for its share of S's net income and dividends for the year but neglected to amortize any of the excess purchase price.

e. During the current year, P sold inventory items to S, its wholly owned subsidiary, at a profit. S sold these inventory items, and S paid P for them before the end of the year. The firms made no elimination entry for this intercompany sale on the consolidation work sheet.

f. Refer to part

e. Assume that S owes P $10,000 for intercompany purchases at year-end. The firm made no elimination entry for this intercompany debt.

g. P owns 90 percent of S. P treats the minority interest in consolidated subsidiaries as a liability. In preparing a consolidated work sheet, the firms made no entry to accrue the minority interest's share of S's net income or of S's net assets.

PROBLEMS AND CASES