Hernandez Company began 2007 with a $120,000 balance in retained earnings. During the year, the following events occurred:

1. The company earned net income of $80,000.

2. A material error in net income from a previous period was corrected. This error correction increased retained earnings by $9,800 after related income taxes of $4,200.

3. Cash dividends totaling $13,000 and stock dividends totaling $17,000 were declared.

4. One thousand shares of callable preferred stock that originally had been issued at $110 per share were recalled and retired at the beginning of 2007 for the call price of $120 per share.

5. Treasury stock (common) was acquired at a cost of $20,000. State law requires a restriction of retained earnings in an equal amount. The company reports its retained earnings restrictions in a note to the financial statements.

Required

1. Prepare a statement of retained earnings for the year ended December 31, 2007.

2. Prepare the note to disclose the restriction of retained earnings.