Question

Question: 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.

You’ve been able to retrieve the following information so far:

Number of common shares authorized	800,000
Number of common shares issued	650,000
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 shares have been reissued.

	Total Cash	Preferred Dividends		Common Dividends
Year	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	87,000	51,000	0.34	36,000	0.09
Year 4	105,000	45,000	0.30	60,000	0.15
Year 5	117,000	45,000	0.30	72,000	0.18
Year 6	165,000	45,000	0.30	120,000	0.30

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?	400,000
How many shares of preferred stock are outstanding?	150,000
What is the preferred dividend as a percent of par?	1%

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

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

No, because the preferred stock cash dividend is always greater than zero.

No, because the common stock cash dividend is not always zero.

Yes, because the number of shares authorized is greater than the number of shares issued.

Correct: 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? Check all that apply.

Year 1

Correct: Year 2

Correct: Year 3

Year 4

Year 5

Year 6

FINAL QUESTION:

The company declared a 4% 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 $26.00 on December 1, and is $32.00 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	33,500,000
Total stockholders’ equity before the stock dividend
Total paid-in capital after the stock dividend	33,084,000
Total retained earnings after the stock dividend
Total stockholders’ equity after the stock dividend

I need help solving the final question in bold. Other questions are already answered. Thank you.

Answer 1

Stock dividend declared
When stock dividend is less than 20-25%, it is considered as small stock dividend
Stock dividend is declared on common stock outstanding
Common stock issued=400000*4%=16000 shares
Journal entry:
Date							Debit	Credit
Dec 1.	Retained earnings				(400000*4%*26)		416000
	Common stock dividend distributable				(400000*4%*20)			320000
	Paid-in capital in excess of par-common stock				400000*4%*(26-20)			96000
	(Stock dividend declared)
Dec 30.	Common stock dividend distributable						320000
	Common stock							320000
	(Stock dividend issued)
Total paid-in capital before stock dividend:
					$
Common stock				(650000*20)	13000000
Preferred stock				(150000*30)	4500000
Paid-in capital in excess of par-common stock					7000000
Paid-in capital in excess of par-preferred stock					0
Total paid-in capital					24500000
Note: the market value of common shares on Date of declaration is relevant and on the date of actual distribution is not relevant
Total retained earnings before the stock dividend=$ 33500000
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=650000-400000=250000
Let's assume that treasury stock acquired at par value
Treasury stock in $=250000*20=$ 5000000
Total stockholder's equity before the stock dividend=24500000+33500000-5000000=$ 53000000
Total paid-in capital after stock dividend:
					$
Common stock				(650000*20)+320000	13320000
Preferred stock				(150000*30)	4500000
Paid-in capital in excess of par-common stock				(7000000+96000)	7096000
Paid-in capital in excess of par-preferred stock					0
Total paid-in capital					24916000
Total retained earnings after the stock dividend=33500000-416000=$ 33084000
Total stockholder's equity after the stock dividend=Total paid-in capital+Total retained earnings-Treasury stock=24916000+33084000-5000000=$ 53000000