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Berkshire Inc. uses a periodic inventory system. At the end of 2015, it missed counting some inventory items, resulting in an inventory understatement by $510,000.

Berkshire Inc. uses a periodic inventory system. At the end of 2015, it missed counting some inventory items, resulting in an inventory understatement by $510,000. 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 12/31/2015 balance sheet?

Assets understated by $510,000 and shareholders' equity understated by $510,000.

Assets understated by $357,000 and shareholders' equity understated by $357,000.

Assets understated by $510,000, liabilities understated by $153,000 and shareholders' equity understated by $357,000.

None of the above is correct.

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