At the beginning of its Year 3 accounting period, Canvas, Inc. had retained earnings of $10,000,000. During Year 3, Canvas reported income from continuing operations before taxes of $1,500,000. The following additional transactions occurred in Year 3 but were not included in the $1,500,000. Assume all of the following were material.

1. During Year 3, Canvas decided to sell an unprofitable segment of its business. The sale of this segment qualifies as a discontinued operation for financial reporting purposes. However, at the end of Year 3, the company had yet to sell the segment. On December 31, Year 3 the segment assets had a fair value minus anticipated costs to sell of $4,000,000 and a book value of $3,500,000. For the year, the segment reported an operating loss of $400,000.
2. At July 1^st, Year 1, the company purchased a machine for $75,000 and no salvage value that had a useful life of 5 years. The bookkeeper used straight-line depreciation for Year 1, Year 2 and Year 3 but erroneously deducted a salvage value of 10,000 when computing the depreciation base.
3. Canvas declared and paid cash dividends of $80,000 on its common stock. The dividend was erroneously recorded as an expense and is included in the $1,500,000.
4. Canvas had a restructuring charge of $45,000 (pre-tax).

REQUIRED: Answer the two questions below.

1) Use all of the information above to prepare a Year 3 income statement for the Canvas Company beginning with income from continuing operations before tax. Assume an income tax rate of 40%.

2) What is the ending balance of retained earnings as of December 31, Year 3?

Answer rating: 100% (QA)

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