Question

1. 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

Fill in the following answers.

How many shares of common stock are outstanding?

Number of common stock outstanding = common dividend (2016) / common dividend per share (2016)

= $180000 / $0.3

= 600000

.

How many shares of preferred stock are outstanding?

Number of preferred stock outstanding = preferred dividend (2016) / preferred dividend per share (2016)

= $45000 / $0.3

= 150000

.

What is the preferred dividend as a percent of par?
Preferred dividend as a percent of par = Dividend per share / preferred stock Par

Preferred dividend as a percent of par = 0.30 / 30 = 0.01 or 1%

.

* Review the definitions of the items, and the amounts that are included in their computation.

.

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, because the number of shares issued is greater than the number of shares outstanding.

.

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

.

Ans: b. Year 2 and C. Year 3

In the year 1, there is arrear in dividend, and the later year 2 and 3, these arrear paid.  

Because the each year the fixed preferred dividend is total $45000, in the first year there only paid dividend of $20000 and remaining $25000 is a arrears and paid preceding year before paying common dividend.

.

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

..

Total paid-in capital before the stock dividend	$23500000
Total retained earnings before the stock dividend	$33500000
Total stockholders’ equity before the stock dividend (23500000 + 33500000 )	$57000000
Total paid-in capital after the stock dividend	$23812000
Total retained earnings after the stock dividend ( 33500000 – ( ( 600000 * 2% ) * 26 ) )	$33188000
Total stockholders’ equity after the stock dividend	$57000000

.

Total paid-in capital before the stock dividend =

Total paid in capital common stock (600000 * $20 + 7000000)	$19000000
Total paid in capital preferred stock (150000 * $30)	4500000
Total paid in capital before stock dividend (19000000+ 4,500,000)	$23500000

.

Total paid-in capital after the stock dividend

It is small stock dividend

Total paid in capital common stock ($19000000 +    ((600000 * 2% ) * $20) + (600000 * 2% ) * 6 )	$19312000
Total paid in capital preferred stock ( 150000 * $30)	4500000
Total paid in capital after stock dividend	$23812000