Question

Pranks, Inc. is a manufacturer of joke and novelty products for perpetrators of practical jokes. The corporation has paid several cash dividends throughout 20Y6, 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					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
	Total Cash	Preferred Dividends		Common Dividends
Year	Dividends	Total	Per Share	Total	Per Share
20Y1	20,000	20,000	0.20	0	0.00
20Y2	36,000	36,000	0.36	0	0.00
20Y3	79,000	34,000	0.34	45,000	0.09
20Y4	105,000	30,000	0.30	75,000	0.15
20Y5	120,000	30,000	0.30	90,000	0.18
20Y6	180,000	30,000	0.30	150,000	0.30

The accounting manager for the company prepared the schedule of cash dividends paid from 20Y1 to 20Y6 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?

In which years has Pranks, Inc. paid cumulative preferred dividends in arrears? Check all that apply.

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

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 $30.00 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
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

A)

1. Number of common stock shares outstanding

       In 20Y6, the dividend per share is 0.30 and Dividend distributed is 150,000, so the number of outstanding shares is:

                 150,000 / 0.30 = 500,000 shares.

2. Number of preferred stock shares outstanding

         In 20Y6 preferred dividend is 0.30 per share with total dividend distributed is 30,000, so the number of outstanding shares is

             = 30,000 / .30 = 100,000 shares.

3. Preferred Dividend as percent of par

    = (Dividend Per share/ Par Value of Share) * 100

   = (0.30 / 30) *100

   = 1%

4. In the year of 20Y2 and 20Y3, Pranks Inc. had paid cumulative preferred dividend in arrears. In the year 20Y2 a dividend of 0.06 per share and in 20Y3 of 0.04 per share related to the year 20Y1 had been paid.

B)

1. Total paid-in capital before the stock dividend

           = Number of share outstanding * Par value per share

          = 500,000 * 20

         = $10,000,000

2. Total Retained Earnings before the stock dividend (Given as is in question)

             = 33,500,000

Total Stockholder equity before stock dividend

Paid in Capital - Common stock	10000000
Paid in Capital in excess of par - common stock	7000000
Paid in Capital - Preferred stock	3000000
Paid in Capital in excess of par - preferred stock	0
Retained Earnings	33500000
Total Shareholders’ equity before stock dividend	53500000

4. Total Retained Earnings after stock dividend declared

  

Dec. 1, 20Y6	Retained earnings	375000
	To Stock Dividend Payable (500,000 * 3% * 25		375000
Dec. 31, 20Y6	Stock Dividend Payable	375000
	To Paid in Capital-common stock		300000
	To Paid in Capital in excess of par-common stock		75000

Balance Retained Earnings = 33500000 – 375000 = 33125000

5. Total Stockholder’s equity after the stock dividend

Total amount will remain unchanged with change in its sub-components

  

Paid in Capital - Common stock	10300000
Paid in Capital in excess of par - common stock	7075000
Paid in Capital - Preferred stock	3000000
Paid in Capital in excess of par - preferred stock	0
Retained Earnings	33125000
Total Shareholders’ equity after stock dividend	53500000

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