Question

Obtain Verizon’s 2021 Annual Report online. Review the financial statements and the notes to the financial statements.

Assume Verizon has a 30% owned investee. Also assume that the investee paid Verizon $8M in dividends and Verizon recorded the following journal entry:
Cash $11M
Dividend Income $11M
What would be the effect on the following items on Verizon’s financials (overstated, understated, or no effect):
a) Working Capital OS US NE
b) Net Income OS US NE
c) Total Assets OS US NE
d) Retained Earnings OS US NE

Answer 1

Verizon's working capital is overstated, net income and total assets have no effect, and retained earnings are understated.

Step-by-step explanation:

a) Working Capital: Overstated
b) Net Income: No Effect
c) Total Assets: No Effect
d) Retained Earnings: Understated

Verizon received $8M in dividends from its 30% owned investee and recorded a journal entry of $11M for Cash and Dividend Income. The effect on working capital would be an overstatement because the Cash increased by $11M without an equal change in current liabilities. The effect on net income would be no effect because Dividend Income increased by $11M, but this is offset by the decrease in the Investee's equity. The effect on total assets would be no effect because the $11M increase in Cash is offset by the decrease in the Investee's equity. The effect on retained earnings would be understated because the $11M increase in Dividend Income is not reflected in the Equity section of the balance sheet.