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 authorized 900,000 Number of common shares issued 750,000 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 Dividends Common Dividends Year Total Cash Dividends Total Per Share Total Per Share Year 1 30,000 30,000 0.20 0 0.00 Year 2 54,000 54,000 0.36 0 0.00 Year 3 105,000 51,000 0.34 54,000 0.09 Year 4 135,000 45,000 0.3 90,000 0.15 Year 5 153,000 45,000 0.3 108,000 0.18 Year 6 225,000 45,000 0.3 180,000 0.3 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 $30 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

Part 1)

The number of common stock outstanding, preferred stock outstanding and preferred dividend as a percent of par is calculated as follows:

Number of Common Stock Outstanding = Total Common Stock Dividend Paid in Year 6 / Dividend Paid Per Share = 180,000 / 0.30 = 600,000 shares

Number of Preferred Stock Outstanding = Total Preferred Dividend Paid in Year 6 / Dividend Paid Per Share

= 45,000 / 0.30 = 150,000 shares

Preferred Dividend as a Percent of Par = (Preferred Dividend Per Share) / Par Value * 100

= 0.30 / 30 * 100 = 1%

Part 2)

1)

Yes, because the number of shares issued (750,000) is greater than the number of shares outstanding (600,000).

2)

The annual preferred dividend is $45,000 (150,000*.30). The company paid a dividend of $30,000 in Year 1. The balance amount of $15,000 (150,000*.30 - 30,000) in arrears for Year 1 is paid as follows:

Year 2 = 54,000 - 45,000 = $9,000

Year 3 = 51,000 - 45,000 = $6,000

Part 3)

The value of paid-in capital before stock dividend, total retained earnings before stock dividend and total stockholder's equity before stock dividend is given below:

Total Paid-in Capital (Common Stock) [600,000*20 + 7,000,000]	19,000,000
Total Paid-in Capital (Preferred Stock) [150,000*30]	4,500,000
Total Paid-in Capital Before Stock Dividend	$23,500,000
Retained Earnings before Stock Dividend	$33,500,000
Total Stockholder's Equity before Stock Dividend [23,500,000 + 33,500,000]	$57,000,000

The value of paid-in capital after stock dividend, total retained earnings after stock dividend and total stockholder's equity after stock dividend is given below:

Total Paid-in Capital (Common Stock) [600,000*20 + 7,000,000 + 600,000*2%*20]	19,240,000
Total Paid-in Capital (Preferred Stock) [150,000*30]	4,500,000
Total Paid-in Capital after Stock Dividend	$23,740,000
Retained Earnings after Stock Dividend [33,500,000 - 600,000*2%*26]	$33,188,000
Total Stockholder's Equity before Stock Dividend	$56,928,000

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