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 authorized900,000

Number of common shares issued750,000

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 DividendsCommon Dividends

YearTotal Cash
DividendsTotalPer ShareTotalPer Share

Year 130,000  30,0000.20      00.00      

Year 254,000  54,0000.36      00.00      

Year 396,000  51,0000.34      45,0000.09      

Year 4120,000  45,0000.3      75,0000.15      

Year 5135,000  45,0000.3      90,0000.18      

Year 6195,000  45,0000.3      150,0000.3      

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 $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$

P11.6 The following data relate to the Plant Assets account of Keller Inc. at December 31, 2019:

Note: In the year an asset is purchased, Keller does not record any depreciation expense on the asset. In the year an asset is retired or traded in, Keller takes a full year's depreciation on the asset.

The following transactions occurred during 2020:

• 1. On May 5, Asset A was sold for $16,500 cash. The company's bookkeeper recorded this retirement as follows:

  Cash		16,500
  Asset A				16,500

• 2. On December 31, it was determined that Asset B had been used 3,200 hours during 2020.
• 3. On December 31, before calculating depreciation expense on Asset C, Keller management decided that Asset C's remaining useful life should be nine years as of year end.
• 4. On December 31, it was discovered that a piece of equipment purchased in 2019 had been expensed completely in that year. The asset cost $31,000, had a useful life of 10 years when it was acquired, and had no residual value. Management has decided to use the double-declining-balance method for this asset, which can be referred to as “Asset E.” Ignore income taxes.

Instructions

a. Prepare any necessary adjusting journal entries required at December 31, 2020, as well as any entries to record depreciation for 2020. Round all amounts to the nearest dollar.

b.  As an owner of Keller Inc., do you have any concerns with respect to the bookkeeper's work?

Conrad Playground Supply underwent a restructuring in 2021. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2021 before any adjusting entries or closing entries are prepared.

1. Additional computers were acquired at the beginning of 2019 and added to the company’s office network. The $49,500 cost of the computers was inadvertently recorded as maintenance expense. Computers have five-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method.
2. Two weeks prior to the audit, the company paid $21,500 for assembly tools and recorded the expenditure as office supplies. The error was discovered a week later.
3. On December 31, 2020, merchandise inventory was understated by $87,000 due to a mistake in the physical inventory count. The company uses the periodic inventory system.
4. Two years earlier, the company recorded a 4% stock dividend (2,900 common shares, $1 par) as follows:

The shares had a market price at the time of $12 per share.

5. At the end of 2020, the company failed to accrue $122,000 of interest expense that accrued during the last four months of 2020 on bonds payable. The bonds, which were issued at face value, mature in 2025. The following entry was recorded on March 1, 2021, when the semiannual interest was paid, as well as on September 1 of each year:

6. A three-year liability insurance policy was purchased at the beginning of 2020 for $74,700. The full premium was debited to insurance expense at the time.

Required:
For each error, prepare any journal entry necessary to correct the error, as well as any year-end adjusting entry for 2021 related to the situation described. (Ignore income taxes.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Do It! Review 14-3 The condensed financial statements of Murawski Company for the years 2019 and 2020 are presented follows. (Amounts in thousands.) MURAWSKI COMPANY Balance Sheets December 31 2020 2019 Current assets Cash and cash equivalents $ 370 $ 368 Accounts receivable (net) 414 468 Inventory 390 480 Prepaid expenses 166 140 Total current assets 1,340 1,456 Investments 14 10 Property, plant, and equipment 350 400 Intangibles and other assets 484 508 Total assets $2,188 $2,374 Current liabilities $ 766 $ 908 Long-term liabilities 350 428 Stockholders’ equity—common 1,072 1,038 Total liabilities and stockholders’ equity $2,188 $2,374 MURAWSKI COMPANY Income Statements For the Years Ended December 31 2020 2019 Sales revenue $3,810 $3,820 Costs and expenses Cost of goods sold 908 942 Selling & administrative expenses 2,300 2,378 Interest expense 21 25 Total costs and expenses 3,229 3,345 Income before income taxes 581 475 Income tax expense 142 81 Net income $ 439 $ 394 Compute the following ratios for 2020 and 2019. (Round current ratio and invertory turnover ratio to 2 decimal places, e.g. 1.62 or 1.62% and all other answers to 1 decimal place, e.g. 1.6 or 1.6%.) (a) Current ratio. (b) Inventory turnover. (Inventory on 12/31/18 was $331.) (c) Profit margin ratio. (d) Return on assets. (Assets on 12/31/18 were $1,912.) (e) Return on common stockholders’ equity. (Stockholders' equity on 12/31/18 was $888.) (f) Debt to assets ratio. (g) Times interest earned.

Conrad Playground Supply underwent a restructuring in 2021. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2021 before any adjusting entries or closing entries are prepared.

1. Additional computers were acquired at the beginning of 2019 and added to the company’s office network. The $46,000 cost of the computers was inadvertently recorded as maintenance expense. Computers have five-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method.
2. Two weeks prior to the audit, the company paid $18,000 for assembly tools and recorded the expenditure as office supplies. The error was discovered a week later.
3. On December 31, 2020, merchandise inventory was understated by $80,000 due to a mistake in the physical inventory count. The company uses the periodic inventory system.
4. Two years earlier, the company recorded a 5% stock dividend (2,200 common shares, $1 par) as follows:

The shares had a market price at the time of $11 per share.

5. At the end of 2020, the company failed to accrue $108,000 of interest expense that accrued during the last four months of 2020 on bonds payable. The bonds, which were issued at face value, mature in 2025. The following entry was recorded on March 1, 2021, when the semiannual interest was paid, as well as on September 1 of each year:

6. A three-year liability insurance policy was purchased at the beginning of 2020 for $72,600. The full premium was debited to insurance expense at the time.

Required:
For each error, prepare any journal entry necessary to correct the error, as well as any year-end adjusting entry for 2021 related to the situation described. (Ignore income taxes.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Pasti Berhad values advertise and sell residential property on behalf of its customers. The company has been in business for only a short time and is preparing a cash budget for the first four months of the year 2020. The expected sales of residential properties are as follows.

The average price of each property is RM180,000 and Pasti Berhad charges a fee of 3% of the value of each property sold. Pasti Berhad receives 1% in the month of sale and the remaining 2% in the month after sale. The company has ten employees who are paid monthly. The average salary per employee is RM36,000 per year. If more than 20 properties are sold each month, each employee will be paid in that month a bonus of RM1,500 for each additional property sold.

Variable expenses are incurred at the rate of 50% of the value of each property sold and these expenses are paid in the month of sale. Fixed overheads of RM44,300 per month are paid in the month in which they arise. Pasti Berhad pays interest every three months on a loan of RM200,000 at a rate of 6% per year. The last interest payment in each year is paid in December.

Outstanding tax liability of RM95,800 is due to be paid in April. In the same month, Pasti Berhad intends to dispose of surplus vehicles, with a net book value of RM15,000, for RM20,000. The cash balance at the start of January 2020 is expected to be a deficit of RM40,000.

Required:
a) Prepare a monthly cash budget for the period from January to April. Your budget must clearly indicate each item of income and expenditure, and the opening and closing monthly cash balances.
b) Discuss the factors to be considered by Pasti Berhad in planning ways to invest any cash surplus forecast by its cash budgets.
c) Discuss the TWO (2) advantages and TWO (2) disadvantages to Pasti Berhad of using overdraft finance to fund any cash shortages forecast by its cash budgets.

Ivanhoe Industries manufactures sump-pumps. Its most popular product is called the Super Soaker, which has a retail price of $1,280 and costs $540 to manufacture. It sells the Super Soaker on a standalone basis directly to businesses. Ivanhoe also provides installation services for these commercial customers, who want an emergency pumping capability (with regular and back-up generator power) at their businesses. Ivanhoe also distributes the Super Soaker through a consignment agreement with Menards. Income data for the first quarter of 2020 from operations other than the Super Soaker are as follows.

Ivanhoe has the following information related to two Super Soaker revenue arrangements during the first quarter of 2020.

HighTech Industries (HTI) is a worldwide manufacturing company that specializes in high technology products for the aerospace, automotive and plastics industries. The state of the art technology and business innovation have been key to HTI's success over the last ten years. After a meeting of the board of directors, there was some feeling that the company was moving away from its goal of striving to maintain and expand their global position through innovative management teams.

One area of concern was with the company's bonus compensation package. The company's current bonus plan focuses on giving reward based on the utilization of capital within the company, i.e. management of inventory, collection of receivables and use of physical assets. Even with such a state of the art bonus plan, the board of directors are concerned with the short-term focus of the compensation package. HTI's basis in current financial practices suggests that the future period consequences of managerial actions will not be reflected when presenting bonus compensation.

Required:

Help HTI solve the problem of its current bonus compensation package. Explain how this bonus compensation package should be revised, if necessary.

A fitness course claims that it can improve an individual's physical ability. To test the effect of a physical fitness course on one's physical ability, the number of sit-ups that a person could do in one minute, both before and after the course, was recorded. Ten individuals are randomly selected to participate in the course. The results are displayed in the following table. Can it be concluded, from the data, that participation in the physical fitness course resulted in significant improvement?

Let d=(number of sit-ups that can be done after taking the course)−(number of sit-ups that can be done prior to taking the course)d=(number of sit-ups that can be done after taking the course)−(number of sit-ups that can be done prior to taking the course). Use a significance level of α=0.01 for the test. Assume that the numbers of sit-ups are normally distributed for the population both before and after taking the fitness course.

Step 1 of 5: State the null and alternative hypotheses for the test.

Step 2 of 5: Find the value of the standard deviation of the paired differences. Round your answer to one decimal place.

Step 3 of 5: Compute the value of the test statistic. Round your answer to three decimal places.

Step 4 of 5: Determine the decision rule for rejecting the null hypothesis H0. Round the numerical portion of your answer to three decimal places.

Step 5 of 5: Make the decision for the hypothesis test.