The stockholders’ equity section of Gaines Industries’ balance sheet appeared as follows at December 31, 2006:

Contributed capital

Preferred stock, 8%, $100 par (5,000 shares authorized, 3,000 shares issued) ... $ 300,000

Common stock, $10 par (25,000 shares authorized, 20,000 shares issued of which

500 shares are being held as treasury stock) ................. 200,000

Premium on preferred stock ........................ 120,000

Premium on common stock ....................... 280,000

Common stock option warrants ....................... 32,000

Total contributed capital ........................ $ 932,000

Retained earnings ............................. 260,000

Total contributed capital and retained earnings .............. $1,192,000

Less: Treasury stock (500 common shares at $31) .............. (15,500)

Total Stockholders’ Equity ...................... $1,176,500

During 2007, the following chronological transactions were recorded:

1. The company issued 1,000 shares of common stock for $40 per share.

2. The company has a share option plan for key executives. In accordance with the plan, the shares under option and the option price per share for each executive are known on the grant date. During 2007 no new options were granted, and compensation expense of $3,000 was recorded in regard to the existing options.

3. Share options to 500 common shares were exercised in 2007 at an option price of $30 per share. The share option value originally recorded in the Common Stock Option Warrants account in regard to these shares amounted to $3 per share.

4. The company reissued 200 shares of its treasury stock for $41 per share.

5. The company accepted land in an industrial park for a factory building site from the Columbus Development Association. The fair value of the land is estimated by an independent appraiser to be $50,000.

6. The law firm of Crook, Rezich, and Romero agreed to accept 100 shares of preferred stock in lieu of legal fees. At the time the preferred stock was selling for $142 per share.

7. Net income for 2007 of $182,000 was transferred from Income Summary to Retained Earnings. Dividends on preferred and common were $24,800 and $43,000, respectively (debit Retained Earnings and credit Cash).

Required

1. Prepare journal entries to record the preceding 2007 transactions for Gaines Industries.

2. Prepare the statement of changes in stockholders’ equity for 2007.

3. Prepare the stockholders’ equity section of the December 31, 2007 balance sheet. Include appropriate notes to the financial statements.

4. Compute the return on stockholders’ equity for 2007.