#21

Berkshire Inc. uses a periodic inventory system. At the end of 2020, it missed counting some inventory items, resulting in an inventory understatement by $530,000. Assume that Berkshire has a 25% 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?

Multiple Choice

Assets understated by $530,000 and shareholders' equity understated by $530,000.

Assets understated by $397,500 and shareholders' equity understated by $397,500.

Assets understated by $530,000, liabilities understated by $132,500 and shareholders' equity understated by $397,500.None of these answer choices are correct.