Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting some inventory items, resulting in an inventory understatement by $670,000. Assume that Berkshire has a 35% income tax rate and that this was the only error it made. If undetected, what is the effect of this error on Berkshire's December 31,2017 balance sheet?

a. Assets understated by $670,000 and shareholders' equity understated by $670,000.

b. Assets understated by $435,500 and shareholders' equity understated by $435,500.

c. None of these answer choices are correct

d. Assets understated by $670.000, liabilities understated by $234,500 and shareholders' equity understated by $435,500

Question

Business

Mariam Walls

20 May, 06:46

Berkshire Inc. uses a periodic inventory system. At the end of 2017, it missed counting some inventory items, resulting in an inventory understatement by $670,000. Assume that Berkshire has a 35% income tax rate and that this was the only error it made. If undetected, what is the effect of this error on Berkshire's December 31,2017 balance sheet?

a. Assets understated by $670,000 and shareholders' equity understated by $670,000.

b. Assets understated by $435,500 and shareholders' equity understated by $435,500.

c. None of these answer choices are correct

d. Assets understated by $670.000, liabilities understated by $234,500 and shareholders' equity understated by $435,500

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Answers (1)

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Neil House · Answer 1

d. Assets understated by $670.000, liabilities understated by $234,500 and shareholders' equity understated by $435,500

Explanation:

Assets in Inventory will be understated by $670.000, this will also understate the tax payable to authorities by $234,500 because profits will be understated and equity will be understated by $435,500.