Effect of recording errors on the balance sheet equation. A firm recorded various transactions with the journal entries shown below. Using the notation O/S (overstated), U/S (understated), or No (no effect), indicate the effects on assets, liabilities, and shareholders' equity of any errors in recording each of these transactions. For example, if a firm recorded the issue of

$10,000 of common stock by debiting Cash and crediting Bonds Payable, the effects of the error are shown as follows:

• Assets — No

• Liabilities— O/S $10,000

• Shareholders' equity— U/S $10,000

(1) Equipment (Asset Increase) 10,000 Cash (Asset Decrease) 2,000 Note Receivable (Asset Decrease) 8,000 To record acquisition of equipment for $2,000 cash and signing of an

$8,000 promissory note for the balance.

(2) Equipment (Asset Increase) 4,000 Cash (Asset Decrease) 1,000 Note Payable (Liability Increase) 3,000 To record the placing of an order for equipment to be delivered next month. The firm made a $1,000 deposit with the order.

(3) Cash (Asset Increase) 800 Accounts Receivable (Asset Decrease) 800 To record an advance from a customer on merchandise to be shipped next month. The customer did not owe the firm any amounts at the time of this transaction.

(4) Prepaid Rent (Asset Increase) 1,000 Rent Payable (Liability Increase) 1,000 To record the signing of a rental agreement for warehouse space for a one-year period beginning next month. The monthly rental fee of $1,000 is due on the first day of each month.

(5) Patent (Asset Increase) 2,500 Cash (Asset Decrease) 2,500 To record the issuance of common stock in the acquisition of a patent.
(6) Merchandise Inventories (Asset Increase) 4,900 Cash (Asset Decrease) 4,900 To record the acquisition of office equipment for cash.