Effect of recording errors on the balance sheet equation Magyar Telekom is a Hungarian telecommunications company. The

Question:

Effect of recording errors on the balance sheet equation Magyar Telekom is a Hungarian telecommunications company. The company applies IFRS and reports its results in millions of Hungarian forints (HUF). For each of the following hypothetical transactions or events facing Magyar Telekom, indicate the effects on assets, liabilities, and shareholders’ equity of failing to record or recording incorrectly the transaction or event. Use the notation O/S (overstated), U/S (understated), or No (no effect). For example, Magyar Telekom’s failure to record the issuance of common stock for HUF10,000 cash ,would be shown as follows:

Assets—U/S HUF10.000

Liabilities No.

Shareholders’ equity—U/S HUF10,000.

(1) Magyar Telekom ordered HUF5,604) million of inventory from a supplier but did not record anything in its accounts.

(2) Magyar Telekom received the merchandise in transaction (1) and recorded it by debiting Inventory and crediting Accounts Payable for HUF6,500 million.

(3) Magyar Telekom acquired new equipment costing If HUF17,000 million by paying HUF2,500 million in cash and signing a note payable for the remainder of the purchase price. It recorded the acquisition by debiting Equipment for HUF2,500 million and crediting Cash for HUF2,500 million.

(4) The firm paid the HUF36,000 million annual insurance premium on its headquarters building by debiting Property and crediting Cash for HUF36,000 million. The insurance period begins nest month.

(5) Magyar Telekom won a contract to supply telecommunications services to a customer next year. The value of the contract is HUF25,000 million. The customer delivered a check to Magyar Telekom in the amount of HUF6,000 million. The firm made no journal entries for these events.

(6) The firm issued 2 million shares of its HUF100 par value common stock when the shares traded in the stock market at HUF700 per share. It issued the shares to acquire land. It recorded the transaction by debiting Lund and crediting Common Stock for HUF200.

(7) The firm signed a three-year employment agreement with its chairperson for an annual salary of HUF6.6 million. The employment period begins next month. The firm did not record anything in its accounts related to this agreement.

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