On January 1, 2007 the Fastor Company had a retained earnings balance of $218,600. It is subject to a 30% corporate income tax rate. During 2007 the company earned net income of $67,000, and the following events occurred:
1. Cash dividends of $3 per share on 4,000 shares of common stock were declared and paid.
2. A small stock dividend was declared and issued. The dividend consisted of 600 shares of $10 par common stock. On the date of declaration the market price of the company’s common stock was $36 per share.
3. The company recalled and retired 500 shares of $100 par preferred stock. The call price was $125 per share; the stock had originally been issued for $110 per share.
4. The company discovered that it had erroneously recorded depreciation expense of $45,000 in 2006 for both financial reporting and income tax reporting. The correct depreciation for 2006 should have been $20,000. This is considered a material error.
1. Prepare journal entries to record items 1 through 4.
2. Prepare Fastor Company’s statement of retained earnings for the year ended December 31, 2007.