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 equity method. P correctly accrues its share of S’s net income for the year. However, when receiving a dividend. P credits Dividend Revenue.
b. P acquired 30% of S on January 1 of the current year for an amount in excess of the carrying 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.
c. During the current year, P sold inventory items to S, it 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.
d. Refer to part c. Assume that S owes P $10,000 for intercompany purchases at year-end. The firm made no elimination entry for this intercompany debt.
e. P owns 90% of S. P treats the non-controlling interest in consolidated subsidiaries as a liability. In preparing a consolidated work sheet, the firms made no entry to accrue the non-controlling interest’s share of S’s net income or of S’s net assets.