The Lester Corporation reports $119,000 of both pretax accounting “income” and taxable income in 2007. In addition to income from continuing operations (of which revenues are $500,000), included in this “income” is a $25,000 extraordinary loss from a fire, a $17,000 loss from operations of discontinued Division W, a $15,000 gain on the disposal of Division W, and a $14,000 correction of an error due to the understatement of bad debt expense in 2006. The company is subject to a 20% tax rate on the first $50,000 of income and a rate of 25% on income in excess of $50,000.

Required

1. Show how this information is disclosed on Lester’s 2007 income statement.

2. Prepare Lester’s 2007 statement of retained earnings. (Assume a beginning retained earnings balance of $191,000 and cash dividends during 2007 amounting to $65,000.)