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	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 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	96,000	51,000	0.34	45,000	0.09
Year 4	120,000	45,000	0.3	75,000	0.15
Year 5	135,000	45,000	0.3	90,000	0.18
Year 6	195,000	45,000	0.3	150,000	0.3

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 $25 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

Solution

Number of common shares issued	650,000
Par value of common shares	$20
Number of preferred shares issued	150,000	=45000/0.3
Par value of cumulative preferred shares	$30
Before Stock Dividend
Common Shares Capital at par	$    13,000,000	=650000*20
Preference Shares Capital at par	$      4,500,000	=150000*30
Paid-in capital in excess of par-common stock	$      7,000,000
Total paid-in capital before the stock dividend	$    24,500,000	=13000000+4500000+7000000
Total retained earnings before the stock dividend	$33,500,000
Total stockholders’ equity before the stock dividend	$    58,000,000	=24500000+33500000
After Stock Dividend
Total paid-in capital before the stock dividend	$    24,500,000
Add: Stock dividend	$          325,000	=650000*2%*25
Total paid-in capital after the stock dividend	$    24,825,000	=24500000 +325000
Total retained earnings before the stock dividend	$33,500,000
Less: Stock dividend	$       (325,000)
Total retained earnings after the stock dividend	$33,175,000	=33500000 - 325000
Total stockholders’ equity before the stock dividend	$    58,000,000	=24500000+33500000