Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assume that Berkshire has a 30% income tax rate and that this was the only error it made. What is the effect of the error on Berkshire's 2018 income statement?

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Business

Kyle Schaefer

11 April, 05:14

Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assume that Berkshire has a 30% income tax rate and that this was the only error it made. What is the effect of the error on Berkshire's 2018 income statement?

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Esther Nicholson · Answer 1

The computation of the effect of the given error is shown below:

Since the inventory is understated by $600,000

Plus, the income tax rate is also given i. e 30%

So the assets should be understated by $600,000

The liabilities would also be understated by

= $600,000 * 30%

= $180,000

And, the stockholder equity is also understated by

= $600,000 - $180,000

= $420,000

Since the tax rate is also understated which decrease the liabilities and the equity as well