Berkshire Inc. uses a periodic inventory system. At the end of 2015, it missed counting some inventory items, resulting in an inventory understatement by $600,000. 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 12/31/2015 balance sheet?

Assets understated by $600,000 and shareholders' equity understated by $600,000.

Assets understated by $600,000, liabilities understated by $210,000 and shareholders' equity understated by $390,000.

Assets understated by $390,000 and shareholders' equity understated by $390,000.

None of the above is correct.