Answer:
Assets understated by $510,000, liabilities understated by $153,000 and shareholders' equity understated by $357,000.
Explanation:
An understatement of closing inventory will have the following effects,
First of all the inventory as an asset is understated by $510,000
Second, this inventory was subject to deduction from the Cost of goods sold as, Cost of goods sold = Opening Inventory + Purchases - Closing Inventory.
Since this amount was not subtracted from the CGS, the gross profit and ultimately the Net profits were understated by $510,000.
This will be added in the net profits.
With an increase in net profits, the tax payable amount also increases. This is calculated as 510,000 * 0.30 = $153,000
So total change in profits is = 510,000 - 153,000 = $357,000
While $153,000 is still payable and is recorded as a tax payable liability.
Thus,
Assets understated by $510,000
Liabilities Understated by $153,000 (tax payable)
Share holders equity understated by $357,000 (part of retained profits)
Hope that helps.
