Pear Co.’s income statement for the year ended December 31, 2006, as prepared by Pear’s controller, reported income before taxes of $125,000. The auditor questioned the following amounts that had been included in income before taxes:

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Unrealized gain on available-for-sale investment

$40,000

Equity in earnings of Cinn Co.

20,000

Dividends received from Cinn

8,000

Adjustments to profits of prior years for arithmetical errors in depreciation

(35,000)

Pear owns 40% of Cinn’s common stock. Pear’s December 31, 2006 income statement should report income before taxes of

  1. $ 85,000
  2. $117,000
  3. $112,000
  4. $152,000