Question

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Chapter 1 Financial Accounting and Business Decisions P1-10B. Income Statement, Statement of Stockholders' Equity, and Balance Sheet Prag Corporation LO5 started business on January 1, 2016. The following information was compiled by Prag's accountant on December 31, 2016: Dividends 8,000o Accounts receivable. 6,750 Common stock. .._. .. . 33,000 Required a. You have been asked to assist the accountant for the Prag Corporation in preparing year-end financial statements. Use the above information to prepare an income statement, statement of stockholders' equity, and a balance sheet as of December 31, 2016 Comment on the decision to pay an $8,000 dividend. b.

Answer 1

a.

Prag Corporation
Income Statement for the year ended December 31,2016
Sales Revenue	$ 52,000
Total Revenue	$ 52,000
Cost and Expenses
Expenses	$ 41000
Total Expenses	$ 41,000
Net Income/(Net Loss)	$ 11,000

Prag Corporation
Retained Earnings Statement for the year ended December 31,2016
Retained Earnings as on January 1, 2016	$ 0
Add: Net Income/(Net Loss)	$ 11,000
Less: Dividend	($ 8,000)
Retained Earnings as at December 31,2016	$ 3,000

Prag Corporation
Statement of Shareholder’s Equity for the year ended December 31,2016
Common Stock	$ 33,000
Total Paid up Capital	$ 33,000
Add: Retained Earnings	$   3,000
Total Stockholder’s Equity	$ 36,000

Prag Corporation
Balance Sheet as at December 31,2016
Assets	Amount ($)	Liabilities and Stockholer’s Equity	Amount ($)
Current Assets		Liabilities
Cash	5,250	Notes Payable	49500
Inventory	5,500	Accounts Payable	8000
Accounts Receivable	6,750	Total Liabilities	$57500
Total Current Assets	17,500
Non-Current Assets		Stockholder’s Equity
Equipment (net)	27,000	Common Stock	33,000
Building(net)	49,000	Retained Earnings	3,000
Total non-current assets	76,000	Stockholder’s Equity	36,000
Total Assets	93,500	Total Liabilities and Stockholer’s Equity	93,500

b. Dividend Paid $ 8000

Dividend payout ratio (8000*100)/11000=72.73%

Since the payout is around 73% it indicates a high payout.A strong dividend policy provides a constant reminder to management that the shareholder return is of utmost importance and is a priority. It becomes inherent part of the culture; a way to tangibly measure the benefits produced for the owners.