Detailed Answer
Correct answer: (B)
Understated by $1,050,000; understated by $1,050,000.
[Net Income: Avail 4 sale:
Cash - Dr: 150k
Investment revenue - Cr: 150k
Net Income: Equity Method:
Investment - Dr: 1.2 mill
Investment revenue - Cr: 1.2 mill
Cash - Dr: 150k
Investment - Cr: 150k
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.]