Lee Corporation: Foreign Acquisition Conversion and Change in Owners Equity

See attached file.

Prepare adjusted income/retained earnings amounts for the beginning of the period, 2007, and show changes to get to the end of period.

Prepare the statement of changes in owner's equity. Include required note disclosures for the owner's equity section.

·         Review the following information:

Lee Corporation, a U.S. company, began operations on January 1, 2004.
During its first 3 years of operations, Lee reported net income and declared dividends as follows:

Net income Dividends declared
2004 $40,000 $ -0-
2005 125,000 50,000
2006 160,000 50,000

The following information relates to 2007:

·         Income before income tax: $240,000
·         Prior period adjustment: understatement of 2005 depreciation expense (before taxes): $ 25,000
·         Cumulative decrease in income from change in inventory methods (before taxes): $35,000
·         Dividends declared (of this amount, $25,000 will be paid on January 15, 2008): $100,000
·         Effective tax rate: 40%

Lee Corporation
Retained Earnings Statement
For the Year Ended December 31, 2007
Balance, January 1, as reported $225,000*
Correction for depreciation error (net of $10,000 tax) -15,000
Cumulative decrease in income from change in inventory methods -21,000
(net of $14,000 tax)
Balance, January 1, as adjusted 189,000
Add: Net income 144,000**
333,000
Less: Dividends declared 100,000
Balance, December 31 $233,000

*($40,000 + $125,000 + $160,000) - ($50,000 + $50,000)
**[$240,000 - (40% X $240,000)]

Common stock $500
Treasury stock (-$200)
Additional paid-in principle $1,000
Shares outstanding 375,940
Shares authorized 500,000
Shares in treasury 30,000

Lee acquired a Canadian subsidiary whose sole asset is a piece of land. Lee acquired the subsidiary on 12/31/04 for the exact value of the land, CA$100,000. Lee owns 100% of the subsidiary. Go to www.x-rates.com and use the historic lookup feature to determine exchange rates on 12/31/04, 12/31/05, and 12/31/06 and 12/31/07.

(Note. Record the necessary journal entries before attempting to calculate other comprehensive income.)
Prepare adjusted income/retained earnings amounts for the beginning of the period, 2007, and show changes to get to the end of period.
Prepare the statement of changes in owner's equity. Include required note disclosures for the owner's equity section.
Show a schedule of adjusted amounts using the exchange rates below.
12/31/04=.830979
12/31/05=.857927
12/31/06=.858222
12/31/07=1.01204