Jethroe Co. reported a retained earnings balance of $200,000 at December 1, 2018. In June 2019, Jethroe discovered that merchandise costing $50,000 had not been included in inventory in its 2018 financial statements. Jethroe has a 35% tax rate. What amount should Jethroe report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 2019?

Adjusted opening balance of retained earnings in its statement of retained earnings at December 31, 2019 = $232,500

Explanation:

Provided inventory of $50,000 not included in stock of the year 2018, which means closing inventory is understated with the same amount for the year 2018, which concludes profit of the year 2018 are understated with the same amount.

Now if that amount is added to closing inventory then profits for the year 2018 will increase net profit will increase by $50,000 - Taxes @35%

Net profit understated = $50,000 - ($50,000 X 35%) = $32,500

Balance of retained earnings at year end will be $200,000 + $32,500 = $232,500

Thus adjusted opening balance of retained earnings in its statement of retained earnings at December 31, 2019 = $232,500