Deck 20: Corporations: Formation and Capital Stock Transactions

Question 1

The stockholders of a corporation are agents of the corporation empowered to act for the firm.

Answer 1

False

Question 2

The ability to convert preferred stock to common stock can make the preferred stock less attractive to investors.

Answer 2

False

Question 3

Callable preferred stock is the stock of another firm that a corporation has purchased as an investment.

Answer 3

False

Question 4

A reduction in dividends distributed to shareholders from one year to the next leads to loss of investor confidence and reduced market prices for the stock.

Question 5

Common stock can be converted to preferred stock at the shareholder's discretion.

Question 6

The "preemptive right" enables shareholders to purchase an equivalent proportion of shares should the corporation issue additional common shares in the future.

Question 7

The amount received in excess of the par value of preferred stock issued is recorded in an account called Paid-in Capital in Excess of Par Value-Preferred Stock.

Question 8

Callable preferred stock gives the issuing corporation the right to repurchase the preferred shares from its shareholders at a specified price.

Question 9

Before dividends can be paid,they must be declared and voted upon by the shareholders.

Question 10

Stock is issued to investors at the time they sign the stock subscription contract.

Question 11

Just like No-par-value stock,par value stock can be sold for any price.

Question 12

The conversion ratio is the number of shares of common stock for which a share of convertible preferred stock may be exchanged.

Question 13

Organization costs are carried indefinitely as an intangible asset in the records of the corporation.

Question 14

Subscriptions Receivable is the control account for the subscribers' ledger.

Question 15

Callable preferred stock gives the shareholder the right to exchange preferred shares of stock for common shares based on the conversion ratio printed on the stock certificate.

Question 16

Organization costs are often expensed when incurred.

Question 17

Preferred Stock is shown in the Stockholders' Equity section of the balance sheet.

Question 18

When common stock is issued,the par value,or stated value,of the shares issued is recorded in the Common Stock account.

Question 19

The entry to record a subscription for 100 shares of common stock at par value would consist of a debit to Subscriptions Receivable-Common and a credit to Common Stock.

Question 20

When shares of a corporation's stock are transferred from one investor to another,an entry is recorded in the capital stock transfer journal.

Question 21

If the issuing corporation retains the right to repurchase the shares of preferred stock from the stockholders at a specified price,the preferred stock is ___________________.

Question 22

The amount paid for stock in excess of par value is called a(n)___________________.

Question 23

A person who signs a(n)____________________ contract agrees to purchase stock and pay for the shares at a later date.

Question 24

Common Stock Subscribed is an equity account.

Question 25

If preferred stock is ____________________,its owners must receive the stated dividends for both the current year and any prior years in which the stated dividend was not paid before the common stockholders can receive any dividend.

Question 26

The holder of a share of 12 percent,$100 par-value preferred stock would receive a dividend of ____________________ per share before any dividend was paid to common stockholders.

Question 27

Stocks may have a(n)___________________,or stated value.

Question 28

The stockholders' ledger for a class of stock is a subsidiary ledger,and the total shares shown must agree with the number of shares in the capital stock account for that class.

Question 29

Profits in the form of ____________________ are paid to the stockholders of a corporation.

Question 30

In respect to corporate debt,stockholders have ____________________ liability.

Question 31

The Common Stock Subscribed account has a(n)____________________ balance.

Question 32

If a corporation sells 400 shares of 12 percent,$100 par-value preferred stock for $105 a share,the entry to record the transaction will include a credit of ____________________ to the Preferred Stock account.

Question 33

Ari Hightower owns 200 shares of preferred stock that is convertible into common stock at the rate of 3 shares for every share surrendered.If she surrenders all her preferred stock,she will have _____________________ shares of common stock.

Question 34

Assets acquired through the issuance of stock are recorded at their historical cost.

Question 35

Stockholders are the ____________________ of a corporation.

Question 36

Stock that carries special privileges or rights is called ____________________ stock.

Question 37

The balance of the Preferred Stock account represents the ____________________ value of the shares issued.

Question 38

The number of shares of common stock that will be issued for each share of convertible preferred stock is referred to as the ___________________.

Question 39

State laws prohibit the issuance of stock at less than par or stated value.

Question 40

A separate Common Stock account is kept in the general ledger for each common stockholder of a corporation.

Question 41

Participating preferred stockholders

A) receive dividends only after common stockholders have been paid dividends.
B) receive preference dividend amounts as well as a share of other dividends paid.
C) receive cumulative dividends if dividends are passed in previous years.
D) give up their voting rights in exchange for dividend preferences.

Question 42

A corporation has 2,000 shares of 10 percent,$50 par-value preferred stock and 20,000 shares of $5 par-value common stock outstanding.If the board of the directors decides to distribute dividends totaling $80,000,the common stockholders will receive a dividend of

A) $3.50 a share.
B) $7.50 a share.
C) $8.00 a share.
D) $10.00 a share.

Question 43

The ___________________ accounts for all stock issued by a corporation and receives all cancelled and newly issued stock certificates from the transfer agent.

Question 44

The stockholders of a corporation

A) have no personal liability for the debts of the corporation.
B) are agents of the corporation empowered to act for the firm.
C) cannot sell their share of stock without obtaining the agreement of other stockholders.
D) will receive a dividend each year.

Question 45

Which of the following statements is correct?

A) The owners of preferred stock are the only stockholders who have the right to vote.
B) All stockholders are guaranteed the right to receive annual dividends.
C) The issuing corporation may retain the right to repurchase shares of preferred stock from the stockholders at a specific price.
D) In a liquidation,common shareholders are paid before preferred shareholders.

Question 46

One disadvantage of a corporation is

A) limited liability.
B) continuous existence.
C) double taxation.
D) transferability of ownership rights.

Question 47

The Preferred Stock account is shown in the

A) Assets section of the balance sheet.
B) Current Liabilities section of the balance sheet.
C) Long-Term Liabilities section of the balance sheet.
D) Stockholders' Equity section of the balance sheet.

Question 48

Subchapter S corporations

A) are subject to double taxation of profits typical of corporate organizations.
B) require that shareholders report their share of profits on their partnership tax returns.
C) are limited liability corporations.
D) are entities formed as corporations but are treated essentially as a partnership so the corporation pays no income tax.

Question 49

Common stockholders will receive a dividend

A) in every year that the corporation is profitable.
B) in every year that the board of directors declares a dividend.
C) every year,whether the corporation is profitable or not.
D) every year that profits exceed a stated amount.

Question 50

When the issuing corporation retains the right to repurchase shares of preferred stock at a specified price,the preferred stock is said to be

A) convertible.
B) callable.
C) participating.
D) nonparticipating.

Question 51

Which of the following statements is correct?

A) Shareholders have personal liability for a corporation's debts.
B) Shareholders must obtain the consent of other shareholders to sell their shares or buy more shares.
C) Limited liability partnership (LLP)partners have liability for their own actions and the actions of those under their control or supervision.
D) Shareholders are legally prohibited from acting as an officer or employee of a corporation.

Question 52

Organization costs should be

A) treated as an operating expense when incurred.
B) debited to an intangible asset account when incurred and systematically charged to expense over a period of up to 40 years.
C) debited to an intangible asset account when incurred and carried at the original amount until the business ceases operations.
D) debited to an intangible asset account when incurred and carried at the original amount until the business begins to earn a profit.

Question 53

A corporation is owned by

A) the individual who started the company.
B) its board of directors.
C) the president of the corporation.
D) its stockholders.

Question 54

A corporation has 10,000 shares of 6 percent,$50 par-value noncumulative preferred stock and 50,000 shares of $4 par-value common stock outstanding.Last year,no dividends were paid.This year,the board of directors decided to pay a dividend of $80,000.The common stockholders will receive a dividend of

A) $0.40 a share.
B) $1.00 a share.
C) $1.60 a share.
D) $2.00 a share.

Question 55

Which of the following statements is correct?

A) Market value is the figure selected by the organizers of the corporation to be assigned to each share of stock for accounting purposes.
B) If there is only one class of stock,the stock is called preferred stock.
C) The authorized capital stock is the number of shares that have been issued and are still in the hands of stockholders.
D) In the event of liquidation,preferred stockholders have a claim on assets before that of common stockholders.

Question 56

A corporation has 4,000 shares of 5 percent,$100 par-value preferred stock and 50,000 shares of $2 par-value common stock outstanding.If the board of the directors decides to distribute dividends totaling $100,000,the common stockholders will receive a dividend of

A) $1.00 a share.
B) $1.60 a share.
C) $2.00 a share.
D) $2.40 a share.

Question 57

Andrews Corporation has 25,000 common shares authorized and 20,000 shares were issued and outstanding at year end.During the year,the corporation's net income after taxes was $50,000.The policy of the corporation has been to declare dividends equal to 15% of its net income.What is the per share amount to be distributed to the common stock holders?

A) $0.30 a share.
B) $0.375 a share.
C) $3.00 a share.
D) $3.75 a share.

Question 58

A corporation has 10,000 shares of 6 percent,$50 par-value cumulative preferred stock and 50,000 shares of $4 par-value common stock outstanding.Last year,no dividends were paid.This year,the board of directors decided to pay a dividend of $80,000.The common stockholders will receive a dividend of

A) $0.40 a share.
B) $1.00 a share.
C) $1.60 a share.
D) $2.00 a share.

Question 59

If only one class of stock is issued by a corporation,it is referred to as

A) preferred stock.
B) company stock.
C) treasury stock.
D) common stock.

Question 60

A corporation has 1,000 shares of 10 percent,$50 par-value preferred stock and 10,000 shares of $5 par-value common stock outstanding.If the board of the directors decides to distribute dividends totaling $40,000,the common stockholders will receive a dividend of

A) $5.00 a share.
B) $4.00 a share.
C) $3.50 a share.
D) $3.75 a share.

Question 61

The entry to record the issuance of 500 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $7,000 and a credit to Common Stock for

A) $5,000 and a credit to Treasury Stock for $2,000.
B) $5,000 and a credit to Paid-in Capital in Excess of Par Value-Common Stock for $2,000.
C) $5,000 and a credit to Gain on Sale of Common Stock for $2,000.
D) $7,000.

Question 62

A corporation received a subscription for 200 shares of 10 percent,$100 par-value preferred stock at $103 a share.The entry to record this transaction consists of a debit to Subscriptions Receivable-Preferred for $20,600 and a credit to

A) Preferred Stock for $20,000 and a credit to Retained Earnings for $600.
B) Preferred Stock Subscribed for $20,000 and a credit to Gain on Sale of Preferred Stock for $600.
C) Preferred Stock Subscribed for $20,000 and a credit to Paid-in Capital in Excess of Par Value-Preferred Stock for $600.
D) Preferred Stock Subscribed for $20,600.

Question 63

A corporation received a subscription for 100 shares of 10 percent,$100 par-value preferred stock at $103 a share.The entry to record this transaction consists of a debit to Subscriptions Receivable-Preferred for $10,300 and a credit to

A) Preferred Stock Subscribed for $10,300.
B) Preferred Stock Subscribed for $10,000 and a credit to Gain on Sale of Preferred Stock for $300.
C) Preferred Stock for $10,000 and a credit to Retained Earnings for $300.
D) Preferred Stock Subscribed for $10,000 and a credit to Paid-in Capital in Excess of Par Value-Preferred Stock for $300.

Question 64

The transfer of stock between shareholders is

A) recorded in the general journal.
B) recorded in the capital stock transfer journal.
C) recorded in the minute book.
D) not recorded by the corporation.

Question 65

The entry to record the issuance of 1,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $14,000 and a credit to Common Stock for

A) $14,000.
B) $10,000 and a credit to Gain on Sale of Common Stock for $4,000.
C) $10,000 and a credit to Paid-in Capital in Excess of Par Value-Common Stock for $4,000.
D) $10,000 and a credit to Treasury Stock for $4,000.

Question 66

The entry to record the issuance of 2,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $28,000 and a credit to Common Stock for

A) $28,000.
B) $20,000 and a credit to Gain on Sale of Common Stock for $8,000.
C) $20,000 and a credit to Treasury Stock for $8,000.
D) $20,000 and a credit to Paid-in Capital in Excess of Par Value-Common Stock for $8,000.

Question 67

Venti Corporation has outstanding 100,000 shares of $50 par-value preferred stock,issued at an average price of $74 a share.The preferred stock is convertible into common stock at the rate of two shares of common stock for each share of preferred stock.Martin Spellman owns 100 shares of the preferred stock.During the current year he decides to convert 50 shares into common stock.How many shares of common stock will he receive?

Question 68

Elsinore Corporation has outstanding 200,000 shares of $100 par-value preferred stock,issued at an average price of $110 a share.The preferred stock is convertible into common stock at the rate of five shares of common stock for each share of preferred stock.Louis Reynault owns 500 shares of the preferred stock.During the current year he decides to convert 225 shares into common stock.How many shares of common stock will he receive?

Question 69

TrustOne Corporation issued 10,000 shares of no-par common stock,$3 stated value in exchange for $45,000.The entry to record the issuance includes a:

A) Debit to Cash for $30,000 and a debit to Paid in Capital in Excess of Stated Value of $15,000.
B) Debit to Common Stock for $45,000.
C) Credit to Common Stock for $30,000.
D) Credit to Common Stock for $45,000.

Question 70

An investor agrees to pay a preferred stock subscription in two monthly installments.Each collection will include a debit to Cash and a credit to

A) Preferred Stock.
B) Preferred Stock Subscribed.
C) Subscriptions Receivable-Preferred.
D) Common Stock Subscribed.

Question 71

A corporation received a subscription for 1,000 shares of 10 percent,$100 par-value preferred stock at $103 a share.The entry to record this transaction consists of a debit to Subscriptions Receivable-Preferred for $103,000 and a credit to

A) Preferred Stock for $100,000 and a credit to Retained Earnings for $3,000.
B) Preferred Stock Subscribed for $100,300.
C) Preferred Stock Subscribed for $100,000 and a credit to Paid-in Capital in Excess of Par Value-Preferred Stock for $3,000.
D) Preferred Stock Subscribed for $100,000 and a credit to Gain on Sale of Preferred Stock for $3,000.

Question 72

SanMartin Corporation has 300,000 shares of $10 par value,common shares authorized through its charter.250,000 shares were issued of which 225,000 shares are currently outstanding.The year-end market price of the stock was $70.Dividends paid at the end of the year were $3 per share.Calculate the total dividends paid.

Question 73

Santorini Corporation has outstanding 300,000 shares of $70 par-value preferred stock,issued at an average price of $84 a share.The preferred stock is convertible into common stock at the rate of four shares of common stock for each share of preferred stock.Maryann Miller owns 880 shares of the preferred stock.During the current year she decides to convert 220 shares into common stock.How many shares of common stock will she receive?

Question 74

The entry to record the issuance of 1,000 shares of $2 stated-value common stock for $10 a share consists of a debit to Cash for $10,000 and a credit to Common Stock for

A) $10,000.
B) $2,000 and a credit to Paid-in Capital in Excess of Par Value-Common Stock for $8,000.
C) $2,000 and a credit to Paid-in Capital in Excess of Stated Value-Common Stock for $8,000.
D) $2,000 and a credit to Gain On Sale of Common Stock for $8,000.

Question 75

Which of the following statements is not correct?

A) The Paid-in Capital in Excess of Par Value-Common Stock account appears in the Stockholders' Equity section of the balance sheet.
B) The Subscriptions Receivable account is shown in the Stockholders' Equity section of the balance sheet.
C) The balance of the Common Stock account appears in the Stockholders' Equity section of the balance sheet.
D) The balance of the Preferred Stock account appears in the Stockholders' Equity section of the balance sheet.

Question 76

The Paid-in Capital in Excess of Par Value-Preferred Stock account would be shown in the

A) Assets section of the balance sheet.
B) Stockholders' Equity section of the balance sheet.
C) Revenue section of the income statement.
D) Expense section of the income statement.