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	40,000	40,000	0.20		0			0.00
Year 2	72,000	72,000	0.36		0			0.00
Year 3	113,000	68,000	0.34		45,000			0.09
Year 4	135,000	60,000	0.30		75,000			0.15
Year 5	150,000	60,000	0.30		90,000			0.18
Year 6	210,000	60,000	0.30		150,000			0.30

The company declared a 3% 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 $25.00 on December 1, and is $32.00 on the actual distribution date of the stock, December 31.

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 =        ?

Total retained earnings after the stock dividend =     ?

Total stockholders’ equity after the stock dividend =      ?

Please help, I'm lost. How do I calculate each of these items?

Answer 1

Outstanding stock:
Common dividend is declared on common stock outstanding
Year 6,Total common dividend=$ 150000
Year 6,Common dividend per share=0.30
Common stock outstanding=150000/0.30=500000 shares
Preferred stock outstanding=Total preferred dividends in Year 6/Preferred dividends per share in year 6=60000/0.30=200000 shares
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=500000*3%=15000 shares
Journal entry:

Date							Debit	Credit
Dec 1.	Retained earnings				(15000*25)		375000
	Common stock dividend distributable				(15000*20)			300000
	Paid-in capital in excess of par-common stock				(Plug)			75000
	(Stock dividend declared)
Dec 31.	Common stock dividend distributable						300000
	Common stock							300000
	(Stock dividend issued)

Total paid-in capital before stock dividend:
					$
Common stock				(650000*20)	13000000
Preferred stock				(200000*30)	6000000
Paid-in capital in excess of par-common stock					7000000
Paid-in capital in excess of par-preferred stock					0
Total paid-in capital					26000000

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=650000-500000=150000
Let's assume that treasury stock acquired at par value
Treasury stock in $=150000*20=$ 3000000
Total stockholder's equity before the stock dividend=26000000+33500000-3000000=$ 56500000
Total paid-in capital after stock dividend:
					$
Common stock				(13000000+300000)	13300000
Preferred stock					6000000
Paid-in capital in excess of par-common stock				(7000000+75000)	7075000
Paid-in capital in excess of par-preferred stock					0
Total paid-in capital					26375000
Total retained earnings after the stock dividend=33500000-375000=$ 33125000
Total stockholder's equity after the stock dividend=Total paid-in capital+Total retained earnings-Treasury stock=26375000+33125000-3000000=$ 56500000