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Berkshire Inc. uses a periodic inventory system. At the end of 2020, it missed counting some inventory items, resulting in an inventory understatement by $660,000. Assume that Berkshire has a 30% 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, 2020 balance sheet

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Answer:

Assets understated by $660,000, liabilities understated by $198,000, and shareholders' equity understated by $462,000

Explanation:

Calculation to determine the effect of this error on Berkshire's December 31, 2020 balance sheet

BERKSHIRE'S December 31, 2020 balance sheet

Assets=$660,000 Understated

Liabilities=$198,000 Understated

Shareholders' equity = $462,000 Understated

($660,000-$198,000)

Therefore the effect of this error on Berkshire's December 31, 2020 balance sheet will be:

Assets understated by $660,000, Liabilities understated by $198,000, and Shareholders' equity understated by $462,000

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