Question

Mastery Problem: Corporations: Organization, Stock Transactions, and Dividends

Pranks, Inc.

Pranks, Inc. is a manufacturer of joke and novelty products for perpetrators of practical jokes. The corporation has paid several cash dividends throughout Year 6, the current year. It is also declaring a stock dividend to its stockholders as the calendar year-end approaches. You’ve been brought in as a consultant to assist with this process, and also to help determine whether some missing information can be determined before the distribution of the stock dividend is made. The company has two classes of stock: common stock and cumulative preferred stock.

Number of common shares authorized900,000

Number of common shares issued750,000

Par value of common shares$20

Par value of cumulative preferred shares$30

Paid-in capital in excess of par-common stock$7,000,000

Paid-in capital in excess of par-preferred stock$0

Total retained earnings before the stock dividend is declared$33,500,000

No treasury share have been reissued.

Preferred DividendsCommon Dividends

YearTotal Cash
DividendsTotalPer ShareTotalPer Share

Year 130,000  30,0000.20      00.00      

Year 254,000  54,0000.36      00.00      

Year 396,000  51,0000.34      45,0000.09      

Year 4120,000  45,0000.3      75,0000.15      

Year 5135,000  45,0000.3      90,0000.18      

Year 6195,000  45,0000.3      150,0000.3      

Cash Dividends

The accounting manager for the company prepared the schedule of cash dividends paid from Year 1 to Year 6 on the Pranks, Inc. panel. However, one of the reasons for Pranks, Inc.’s missing information is that the manager is away on vacation and is unreachable by phone, because he is backpacking on a remote island that does not have cell phone reception. Management would like you to determine some information from the data you’ve collected regarding its outstanding stock.

Fill in the following answers.

How many shares of common stock are outstanding?

How many shares of preferred stock are outstanding?

What is the preferred dividend as a percent of par?
%

Additional Questions

1. After completing the Cash Dividends panel, answer the following question.

Does Pranks, Inc. have any treasury stock? How can you tell?

2. In which years has Pranks, Inc. paid cumulative preferred dividends in arrears?

a.Year 1

b.Year 2

c.Year 3

d.Year 4

e.Year 5

f.Year 6

Stock Dividend

The company declared a 2% common stock dividend on December 1, and would like you to compute the following pieces of missing information. The market value of the common shares is $26 on December 1, and is $32 on the actual distribution date of the stock, December 31.

Fill in the missing information in the following table, using the information given and your work on the other panels. All “before” items are before the stock dividend was declared. All “after” items are after the stock dividend was declared and closing entries were recorded at the end of the year.

Total paid-in capital before the stock dividend$

Total retained earnings before the stock dividend

Total stockholders’ equity before the stock dividend$

  

Total paid-in capital after the stock dividend$

Total retained earnings after the stock dividend

Total stockholders’ equity after the stock dividend$

Answer 1

ANSWER:

PART - A

1) How many shares of common stock are outstanding?

Particulars	Amount
Year 6,Total common dividend (A)	150,000
Year 6,Common dividend per share (B)	0.3
Number of Common Shares outstanding (A / B)	500,000‬

2) How many shares of preferred stock are outstanding?

Particulars	Amount
Year 6, Total preferred dividend (A)	45,000
Year 6, Preferred dividends per share (B)	0.3
Number of Preferred stock outstanding (A / B)	150,000‬

3) What is the preferred dividend as a percent of par?

Particulars	Amount
Year 6, Preferred dividends per share (A)	0.30
Par value of cumulative preferred shares (B)	30
Preferred dividend as a % of par (A / B)	1%

Additional Questions

1) After completing the Cash Dividends panel, answer the following question. Does Pranks, Inc. have any treasury stock? How can you tell?

Yes, Pranks Inc. have treasury stock, because the number of shares issued (750,000) is greater than the number of shares outstanding (500,000).

2) In which years has Pranks, Inc. paid cumulative preferred dividends in arrears?

Year 2 and Year 3.

Explanation:

Annual preferred dividend = 150,000 * 0.30 = $45,000

The balance amount of $15,000 [(150,000 * 0.30) - 30,000] in arrears for 20Y1 is paid as follows:

Year 20Y2 = 54,000 - 45,000 = $9,000

Year 20Y3 = 96,000 - 45,000 = $51,000‬

PART - B

1) Total paid-in capital before the stock dividend

Particulars	Amount
Common stock (750,000 * 20)	15,000,000‬
Preferred stock (150,000 * 30)	4,500,000‬
Paid-in capital in excess of par-common stock	7,000,000
Paid-in capital in excess of par-preferred stock	0
Total paid-in capital before the stock dividend	$26,500,000‬

2) Total retained earnings before the stock dividend = $33,500,000

3) Total stockholders’ equity before the stock dividend

Total stockholder's equity before the stock dividend = Total paid-in capital + Total retained earnings - Treasury stock

Number of shares in treasury stock

= Number of common shares issued - Number of common shares outstanding

= 750,000 - 500,000 = 250,000

Let's assume that treasury stock is acquired at par value

Treasury stock in $ = 250,000 * 20 = $5,000,000‬

Total stockholder's equity before the stock dividend = $26,500,000 + $33,500,000 - $5,000,000‬ = $55,000,000‬