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

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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