Error on the investment account

Reference no: EM13122159

Hope Company bought 30% of Faith Corporation in 2011. Hope's purchase price equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2011, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2011?

a. Understated by $1,050,000; understated by $1,050,000

b. Overstated by $1,050,000; understated by $1,050,000

c. Understated by $1,200,000; overstated by $1,050,000

d. Overstated by 1,200,000; overstated by $1,200,000

Reference no: EM13122159

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