Case Number 01 (Multi-step Income & Retained Earnings) Presented below is information related to American Horse Company for 2004.

Retained earnings balance, January 1, 2004 $ 850,000 Sales for the year 35,000,000 Cost of goods sold 17,000,000 Depreciation Expense mistakenly not reported,2002 32,000 Telephone - Sales 17,000 Advances from customers 117,000 Interest revenue 70,000 Rental revenue 50,000 Write-off of inventory due to obsolescence 80,000 Accumulated depreciation Equipment 40,000 Accumulated depreciation Building 28,000 Write-off of goodwill (Infrequent or Unusual Item) 820,000 Sales Discounts 15,000 Sales Return 25,000 Overstatement of income due change in inventory costing method 88,000 Prepaid insurance 20,000 Income taxes for 2004 905,000 Travel and entertainment 69,000 Advertising 54,000 Transportation-out 93,000 Sales commissions 83,000 Gain on the sale of investments (normal recurring) 110,000 Loss due to flood damageextraordinary item 390,000 Loss on the disposition of the wholesale division 440,000 Loss on operations of the wholesale division 90,000 Dividends declared on common stock 250,000 Dividends declared on preferred stock 70,000 Requirement

a. Prepare a multi-step income statement and a retained earnings statement. American Horse Company decided to discontinue its entire wholesale operations and to retain its manufacturing operations. On September 15, American Horse sold the wholesale operations to Rogers Company. During 2004, there were 300,000 shares of common stock outstanding all year.

b. Discuss how the extraordinary gain and losses are treated differently in the income statement as compare to unusual or infrequent item?