Hope Company Bought 30% of Faith Corporation in 2009

Hope Company bought 30% of Faith Corporation in 2009. 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 2009, 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 the using the equity method. What effect would this error have on the investment account and net income, respectively, for 2009?

A) Overstated by $1,050,000; understated by $1,050,000.
B) Understated by $1,050,000; understated by $1,050,000.
C) Overstated by $1,200,000; overstated by $1,200,000.
D) Understated by $1,200,000; overstated by $1,050,000.Net increase in investment of $1,200,000 - $150,000 = $1,050,000 was not reported when the investment was classified as securities available for sale.Also, the reported investment revenue of $150,000 was $1,050,000 less than the $1,200,000 that should have also been reported.