Company B began 2013 with a $110,000 balance in retained earnings. The following events occurred during the year:

Cash dividends of $18,500 were declared.

4,500 shares of callable preferred stock were recalled and retired for a price of $225 per share. The stock was originally issued for $150 per share.

Net income was $550,000.

A material error in net income for a previous period was corrected. The correction of the error decreased retained earnings by $18,500 after a related income tax.

The following is required:

1. Prepare the statement of retained earnings for the year ended 2013, and any note disclosures separately.

2. Discuss the restriction of retained earnings that the board of directors can impose and why it would be necessary.