The stockholders’ equity of the Cory Company on January 1, 2007 is as follows:

Preferred stock, 8%, $100 par, callable at $116 ... $100,000

Preferred stock, 7%, $100 par ........... 150,000

Common stock, $10 par .............. 220,000

Premium on capital stock ............ 160,000

Retained earnings ............... 182,200

$812,200

In January 2007 the company recalled and retired the 8% preferred stock. This stock originally had been issued for $105 per share. In April it declared and issued a 10% stock dividend on the common stock; the stock was then selling for $16 per share. This was the only issuance of common or preferred stock during the year. During November the company reacquired as treasury stock 1,000 shares of its common stock at $18 per share (it uses the cost method for treasury stock). State law requires a restriction of retained earnings equal to the cost of all treasury shares held. The company discloses this restriction by means of a note to the financial statements. In December the annual cash dividends on the outstanding preferred stock and a $1 per share cash dividend on the outstanding common stock were declared and paid. At the end of December net income of $87,000 was closed from Income Summary to Retained Earnings. During the year-end audit it was found that two errors had been made during 2006 for both financial reporting and income tax reporting. First, depreciation on certain machinery in the amount of $10,000 was inadvertently omitted. Second, a mathematical mistake was made in the calculation of the accumulated depreciation related to the sale of equipment. Consequently, the reduction in accumulated depreciation and the amount of the gain recognized were both understated by $8,000. Both errors are considered material. The company has been subject to a 30% income tax rate for the past several years.

Required

1. Prepare journal entries to record the preceding transactions.

2. Prepare Cory Company’s statement of retained earnings and any related notes to its financial statements for the year ended December 31, 2007.