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Question 2: At the beginning of its Year 4 calendaryear accounting period, Blue Hens, Inc. had retained earnings of $7,500,000. During Year 4, Blue Hens
Question 2: At the beginning of its Year 4 calendaryear accounting period, Blue Hens, Inc. had retained earnings of $7,500,000. During Year 4, Blue Hens reported income from continuing operations before taxes of $1,200,000. The following additional transactions occurred in Year 4 but were not included in the $1,200,000. Assume all of the following were material. 1. Blue Hens had a restructuring charge of $17,000 (pretax). 2. Blue Hens had an uninsured flood loss of $275,000 (pretax) which was considered to be both unusual and infrequent in nature. 3. During Year 4, Blue Hens decided to sell an unprofitable segment of its business. The sale of this segment qualifies as a discontinued operation for financial reporting purposes. However, at the end of Year 4, the company had yet to sell the segment. On December 31, Year 4 the segment assets had a fair value minus anticipated costs to sell of $3,800,000 and a book value of $4,100,000. For the year, the segment reported an operating loss of $600,000. 4. Blue Hens declared and paid cash dividends of $80,000 on its common stock. 5. At the beginning of Year 1, the company purchased a machine for $60,000 and fully expensed it during Year 1. The company would normally have used the straightline depreciation method with a $5,000 salvage value and 10 year useful life. This was discovered as the accountant was reviewing the information for the Year 4 financial statements. Depreciation expense on this machine for Year 4 was not included in the $1,200,000 above. a. Prepare an income statement for the year Year 4, beginning with Income from Continuing Operations before Taxes. Assume the tax rate was 40%. b. What is the ending Retained Earnings balance for Blue Hens, Inc. as of December 31, Year 4?
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