MC Qu. 65 LO 20-06 Berkshire Inc. uses a periodic inventory system. At the end o
ID: 2500877 • Letter: M
Question
MC Qu. 65 LO 20-06 Berkshire Inc. uses a periodic inventory system. At the end of...
Berkshire Inc. uses a periodic inventory system. At the end of 2012, it missed counting some inventory items, resulting in an inventory understatement by $580,000. Assume that Berkshire has a 30% income tax rate and that this was the only error it made.
Assets understated by $580,000, liabilities understated by $174,000 and shareholders' equity understated by $406,000.
None of these is correct.
Assets understated by $406,000 and shareholders' equity understated by $406,000.
Assets understated by $580,000 and shareholders' equity understated by $580,000.
Berkshire Inc. uses a periodic inventory system. At the end of 2012, it missed counting some inventory items, resulting in an inventory understatement by $580,000. 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 12/31/2012 balance sheet?Explanation / Answer
Answer
Assets understated by $580,000, liabilities understated by $174,000 and shareholders' equity understated by $406,000.
Note :
Inventory understated by = $ 580000
Income Tax liability understated by = 580000*30% = 174000
Retained Earning Understated by = Net income afte tax understated
Retained Earning Understated by = 580000*(1-30%) = 406000
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