Lee Company's records showed the following account balances at December 31, 2007:

Prepaid expense .............................................$70000

Selling expenses ...........................................$340,000

Cost of goods sold ......................................4,300,000

Rent revenue ...................................................42,000

Interest expense ...............................................25,000

Sales ...........................................................9,200,000

General and administrative expense ..............420,000

Accumulated amortization ............................320,000

Sales returns and allowances ...........................20,000

Customer deposits ...........................................40,000

Retained earnings, January ......................1 1,425,000

Dividends declared and paid .........................115,000

The following events also occurred during 2007:

1. The company had 40,000 common shares issued and outstanding on January 1, 2007 and 100,000 common shares authorized. On June 1, 2007, 10,000 additional common shares were issued.

2. During 2007 the company sold a machine was used in the manufacturing operations for $26,000. The machine was purchased in 2003 for $45,000. At the date of the disposition the machine had a carrying value of $12,500.

3. New information was given to the controller about the calculation of the bad debt expense. In the past the controller used 2% of net sales. Based on new information the controller should use 3% of net sales. If 3% had been used in 2006 an additional $65,000 worth of bad debt expense would have been recorded. The bad debt expense for 2007 was accidentally calculated using the old rate. Bad debt expense is included in the selling expenses.

4. On September 1, 2007 the company adopted a plan to discontinue a major operating segment. The company estimates that the segments assets will be sold for $50,000 more than their book value in 2008. Results of the operations of the business segment during 2007 (excluded from the above figures) were as follows: Sales $400,000 Cost of goods sold $180,000, Selling expenses $90,000, and General and administrative expenses $165,000.

5. The depreciation method used for the office building was changed from the straight- line method to the double-declining balance method. The cumulative effect of the change on the prior years' income is a decrease of $35,000. Depreciation expense for 2007, included in general and administrative expenses, has been correctly computed using the double-declining method.

6. It was discovered that legal expenses were overstated for 2006 by $22,000 due to a mathematical error.

Required:

Prepare a multi-step income statement and a statement of retained earnings in good form for the year ended December 31, 2007. Lee's income tax rate is 30%.