Ashwood, Inc. is a public enterprise whose shares are traded in the over-the-counter market. At December 31,

Question:

Ashwood, Inc. is a public enterprise whose shares are traded in the over-the-counter market. At December 31, 2006 Ashwood had 6,000,000 authorized shares of $10 par value common stock, of which 2,000,000 shares were issued and outstanding. The stockholders’ equity accounts at December 31, 2006 had the following balances:

Common stock ........ $20,000,000

Additional paid-in capital .... 7,500,000

Retained earnings ........ 6,470,000

Transactions during 2007 and other information relating to the stockholders’ equity accounts were as follows:

1. On January 5, 2007, Ashwood issued at $54 per share, 100,000 shares of $50 par value, 9%, cumulative convertible preferred stock. Each share of preferred stock is convertible, at the option of the holder, into two shares of common stock. Ashwood had 600,000 authorized shares of preferred stock.

2. On February 2, 2007, Ashwood reacquired 20,000 shares of its common stock for $16 per share. Ashwood uses the cost method to account for treasury stock.

3. On April 27, 2007, Ashwood sold 500,000 shares (previously unissued) of $10 par value common stock to the public at $17 per share.

4. On June 18, 2007, Ashwood declared a cash dividend of $1 per share of common stock, payable on July 13, 2007 to stockholders of record on July 2, 2007.

5. On November 9, 2007, Ashwood sold 10,000 shares of treasury stock for $21 per share.

6. On December 14, 2007, Ashwood declared the yearly cash dividend on preferred stock, payable on January 14, 2008 to stockholders of record on December 31, 2007.

7. On January 18, 2008, before the books were closed for 2007, Ashwood became aware that the ending inventories at December 31, 2006 were understated by $300,000 (the after-tax effect on 2006 net income was $210,000). The appropriate correcting entry was recorded the same day.

8. After correcting the beginning inventory, net income for 2007 was $4,500,000.

Required

1. Prepare a statement of retained earnings for Ashwood for the year ended December 31, 2007. Assume that only single period financial statements for 2007 are presented.

2. Prepare the stockholders’ equity section of Ashwood’s balance sheet at December 31, 2007.

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