[rchie]

Lee Corporation, a U.S. company, began operations on January 1, 2004.
During its first 3 years of operations, Lee reported net income and declared dividends as follows.

Net income Dividends declared
2004 $ 40,000 $ –0–
2005 125,000 50,000
2006 160,000 50,000

The following information relates to 2007:

Income before income tax: $240,000
Prior period adjustment: understatement of 2005 depreciation expense (before taxes): $ 25,000
Cumulative decrease in income from change in inventory methods (before taxes): $35,000
Dividends declared (of this amount, $25,000 will be paid on January 15, 2008): $100,000
Effective tax rate: 40%






Lee Corporation
Retained Earnings Statement
For the Year Ended December 31, 2007
Balance, January 1, as reported $225,000*
Correction for depreciation error (net of $10,000 tax) (15,000)
Cumulative decrease in income from change in
inventory methods (net of $14,000 tax)
(21,000)
Balance, January 1, as adjusted 189,000
Add: Net income 144,000**
333,000
Less: Dividends declared 100,000
Balance, December 31 $233,000

*($40,000 + $125,000 + $160,000) – ($50,000 + $50,000)
**[$240,000 – (40% X $240,000)]

Common stock $500
Treasury stock (-$200)
Additional paid-in principle $1000
Shares outstanding 375,940
Shares authorized 500,000
Shares in treasury 30,000

• Lee acquired a Canadian subsidiary whose sole asset is a piece of land. Lee acquired the subsidiary on 12/31/04 for the exact value of the land, CA$100,000. Lee owns 100% of the subsidiary. Go to Exchange Rates and use the historic lookup feature to determine exchange rates on 12/31/04, 12/31/05, and 12/31/06.

Prepare a statement of changes in owner’s equity and accompanying notes appropriate to the section. Note. Record the necessary journal entries before attempting to calculate other comprehensive income.

[cnader]

Journal entries

Retained earnings debited for 25,000
Depreciation expense credited for 25,000

Retained earnings debited for 35,000
Inventory credited for 35,000

Retained earnings debited for 100,000
Dividends payable credited for 100,000