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 December 31,2018 balance sheet?
A) There are no errors in the December 31,2018 balance sheet.
B) Assets understated by $600,000 and shareholders' equity understated by $600,000.
C) Assets understated by $420,000 and shareholders' equity understated by $420,000.
D) Liabilities understated by $180,000 and shareholders' equity overstated by $420,000.

Question

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 December 31,2018 balance sheet?
A) There are no errors in the December 31,2018 balance sheet.
B) Assets understated by $600,000 and shareholders' equity understated by $600,000.
C) Assets understated by $420,000 and shareholders' equity understated by $420,000.
D) Liabilities understated by $180,000 and shareholders' equity overstated by $420,000.

Quizplus · Accepted Answer

The inventory error self-corrects over the two years.