Deck 20: Corporations: Organization and Capital Stocks

Question 1

Stocks that carry certain specified preferences, or first claims, are called common stock.

Answer 1

False

Question 2

The certificate of incorporation is frequently referred to as the bylaws.

Answer 2

False

Question 3

Corporations are chartered either with perpetual life or with the provision for renewal if the charter specifies a limit, irrespective of the deaths of any stockholders, or disposal of their stock.

Answer 3

True

Question 4

In the stockholders' equity section of a corporation's balance sheet, stockholders' equity and paid-in capital are separated by source.

Question 5

A major disadvantage of a corporation is that it must pay income taxes.

Question 6

The total number of shares the corporate charter allows a corporation to issue is called authorized stock.

Question 7

One of the major advantages of the corporate form of ownership is the relaxation of governmental regulations.

Question 8

Change in ownership through transfer of shares or death of owners ends the life of a corporation.

Question 9

A corporation's life is specified in its charter.

Question 10

Stock certificates are issued when the corporation receives a capital stock subscription.

Question 11

A major disadvantage of the corporate form of organization is the manner in which corporations pay income taxes.

Question 12

There are more businesses organized as corporations than as sole proprietorships and partnerships in the United States.

Question 13

In the stockholders' equity section of a corporation's balance sheet, preferred stock is listed before common stock because of its preferred claim to dividends and/or assets.

Question 14

Shares of stock that have been reacquired by the issuing company are called treasury stock and the treasury stock account is debited for the cost.

Question 15

The price at which a share of capital stock may be purchased or sold on the open market is described as its par value.

Question 16

Stated value is a value assigned to each share by the corporate president and printed on the stock certificate.

Question 17

Double taxation is the process of taxing corporate income both to the company that earns it and to the stockholders of the company who receive it.

Question 18

The stockholders elect a board of directors and the board determines corporate policies and selects the corporate officers.

Question 19

Limited liability of the owners means that the stockholders of a corporation share a personal liability for all debts of the corporation.

Question 20

Usually, any stockholder can transfer stock to another person without the knowledge or the consent of the other stockholders, as long as they have received permission from the corporation.

Question 21

When a corporation issues stock for noncash assets, it records the transaction at the fair market value of the assets or of the stock, whichever can be more clearly determined.

Question 22

Dividends are equivalent to withdrawals in a sole proprietorship or partnership.

Question 23

If preferred dividends are limited to the stated dividend rate, the stock is said to be participating.

Question 24

No-par stock that is assigned a stated value by the board of directors is accounted for in virtually the same way as par value stock.

Question 25

Incorporation fees, attorneys' fees, and promotional expenses are known as organization costs and are expensed in the first two years of operation of the corporation.

Question 26

The account that represents the accumulated earnings of the corporation that have not been paid out to stockholders as dividends is called Paid In Capital in Excess of Par.

Question 27

The officers of the corporation generally manage the business and are responsible to the board of directors.

Question 28

Corporations rarely issue stock at a discount because firms generally set very low par values and the practice is even illegal in many states.

Question 29

It is a common practice to amortize organizational costs over a period of five to ten years.

Question 30

When common stock is issued at a premium, Paid-In Capital in Excess of Par-Common Stock is credited.

Question 31

Treasury stock refers to the shares of stock that have been reacquired by the issuing corporation and that have not been formally canceled.

Question 32

Preferred stock on which the unpaid dividends for one year are added to dividends to be received the following year is called cumulative.

Question 33

When preferred stock has a dividend preference, it is usually stated as a dollar amount per share or as a percentage of par value.

Question 34

When a corporation sells its capital stock, certificates are issued to the stockholders and the stock is said to be issued and outstanding.

Question 35

Most preferred stock currently being issued is participating, while it is very unusual to find the cumulative feature in preferred stock today.

Question 36

The right of a stockholder to purchase additional shares in proportion to the owner's present holdings, if more shares are issued by the corporation, is known as a preemptive right.

Question 37

If there is only one class of stock outstanding, such stock would be classified as preferred stock.

Question 38

Preferred stock is stock that gives its owner certain preferences or rights superior to those of common stock.

Question 39

Preferred stock usually has voting rights.

Question 40

If there is an equal division of any excess dividends between the preferred shares and common shares, without any limit as to the amount the preferred shares may receive, the preferred stock is said to be nonparticipating.

Question 41

The price at which a share of capital stock may be purchased or sold at a given time is called its

A) market value.
B) par value.
C) stated value.
D) book value.

Question 42

The stockholders' equity section of the corporate balance sheet is separated into paid-in capital and retained earnings.

Question 43

The ability of any stockholder to transfer stock to another person without the knowledge or the consent of the other stockholders and without disturbing the normal activities of the corporation is called

A) unlimited life.
B) suitability for large scale operations.
C) taxation of corporate earnings.
D) transferable ownership units.

Question 44

If shares of stock are sold or exchanged for more than par value, the excess is called

A) a discount.
B) a gain.
C) a premium.
D) earnings.

Question 45

A journal entry for the sale of $10-par common stock for $18 per share would include

A) a debit to Cash.
B) a debit to Common Stock.
C) a debit to Treasury Stock.
D) a debit to Paid-In Capital in Excess of Par - Common Stock.

Question 46

A corporation purchases 4,000 shares of its $10 par common stock for $16 per share. The debit part of the journal entry for this transaction would be to

A) Cash, $64,000.
B) Common Stock, $40,000.
C) Common Treasury Stock, $40,000.
D) Common Treasury Stock, $64,000.

Question 47

Paid-in capital from sale of treasury stock could appear as an addition or deduction on the stockholders' equity section of the balance sheet.

Question 48

Unless specifically denied, each share of capital stock of a business corporation gives its owner the right to

A) manage the daily operations of the corporation.
B) hire and fire employees.
C) set company policy.
D) share in the assets if the corporation liquidates.

Question 49

Which of the following are considered to be legal entities that exist separate and distinct from their owners?

A) sole proprietorships
B) partnerships
C) corporations
D) organizations with more than 100 partners

Question 50

Treasury Stock is a company investment in its own stock and is reported as an asset.

Question 51

If there is only one class of stock outstanding, such stock would be classified as

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

Question 52

A corporation's common stock dividends is

A) debited to Retained Earnings.
B) credited to Retained Earnings.
C) debited to Paid-In Capital.
D) credited to Paid-In Capital.

Question 53

If preferred dividends are limited to the stated dividend rate, the stock is said to be

A) participating.
B) nonparticipating.
C) cumulative.
D) noncumulative.

Question 54

Stocks that carry certain specified preferences, or first claims, are called

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

Question 55

The corporate form of organization offers which of the following disadvantages?

A) dissolution upon the death of a stockholder
B) attorney's fees
C) limited life
D) unlimited liability

Question 56

The journal entry for the receipt of a cash payment on common stock subscriptions would include

A) debiting Cash and crediting Common Stock Subscriptions Receivable.
B) debiting Cash and crediting Common Stock.
C) debiting Common Stock and crediting Common Stock Subscriptions Receivable.
D) debiting Common Stock Subscriptions Receivable and crediting Common Stock.

Question 57

Withdrawals in a sole proprietorship or partnership are equivalent to which of the following in a corporation?

A) net income
B) dividends
C) salaries
D) retained earnings

Question 58

A nominal amount determined by the corporation directors and assigned to no-par stock is called

A) book value.
B) stated value.
C) market value.
D) par value.

Question 59

Because corporations are chartered either with perpetual life or with provision for renewal if the charter specifies a limit, irrespective of the deaths of any stockholders or disposal of their stock, corporations are said to have the characteristic of

A) limited liability of owners.
B) transferable ownership units.
C) taxation of corporate earnings.
D) unlimited life.

Question 60

A form issued by the corporation that shows the name of the stockholder and the number of shares owned is called a

A) stock certificate.
B) proxy.
C) charter.
D) article of incorporation.

Question 61

If stock is issued at a price above par value, the transaction that would be recorded is to

A) debit Cash, credit Common Stock or Preferred Stock, and credit Paid-In Capital in Excess of Par.
B) debit Common Stock or Preferred Stock, debit Paid-In Capital in Excess of Par, and credit Cash.
C) debit Cash, debit Common Stock or Preferred Stock, and credit Paid-In Capital in Excess of Par.
D) debit Paid-In Capital in Excess of Par, credit Common Stock or Preferred Stock, and credit Cash.

Question 62

Preferred stock, on which the claims for unpaid dividends may be accumulated from year to year, is called

A) participating.
B) nonparticipating.
C) cumulative.
D) noncumulative.

Question 63

As of December 31, 20--, the balances of the stockholders' equity accounts of Higbie Auto Inc. were as follows: Required:
Based on this information, prepare the stockholders' equity section of the Higbie Auto Inc. balance sheet as of December 31, 20--.

Question 64

If shares of stock are sold for less than their par value, the difference is called

A) a discount.
B) a gain.
C) a premium.
D) earnings.

Question 65

Based on the following information, prepare journal entries for Windgate Corporation.
Mar. 7
Issued 10,000 shares of $5 par common stock for $43,000 casH.16
Issued 6,000 shares of $5 par common stock for $33,000 casH.23
Issued 4,000 shares of $12 par, 7% preferred stock for $53,000 casH.29
Issued 5,000 shares of $4 par common stock for land with a fair market value of $28,000.
​

Question 66

Preferred stock that is given a right to share with the common stock in dividends in excess of a stated dividend rate is said to be

A) participating.
B) nonparticipating.
C) cumulative.
D) noncumulative.

Question 67

Prepare the appropriate general journal entries for the following treasury stock transactions of Aberdeen InC.Oct. 15
Purchased 7,000 shares of its $15 par common stock for $70,000 and placed the stock in the treasury.
Dec. 1
Sold 2,000 shares of the treasury stock for $18,000 casH.Dec. 31
Sold the remaining treasury stock for $56,000 casH.​

Question 68

The major classes of stock are

A) common and preferred stock.
B) common and treasury stock.
C) preferred and treasury stock.
D) common and authorized stock.

Question 69

If shares of preferred stock are sold at par value for cash, the transaction would be entered by

A) debiting Cash and crediting Preferred Stock.
B) debiting Preferred Stock and crediting Cash.
C) debiting Preferred Stock Subscriptions Receivable and crediting Preferred Stock.
D) debiting Preferred Stock Subscribed and crediting Preferred Stock.

Question 70

The Creative Interiors Corporation has 40,000 shares of $12 par common stock and 12,000 shares of $50 par, 5% preferred stock outstanding. Dividends totaling $156,000 are distributed to common and preferred shareholders combined. Compute the dividends to be distributed to preferred and common stockholders in total and per share under the following independent conditions. (Round to the nearest cent if necessary).
a.
The preferred stock is nonparticipating and noncumulative with no dividends distributed last year.
b.
The preferred stock is noncumulative and fully participating after the common shareholders have received dividends per share equal to the preferred stock.
c.
The preferred stock is cumulative and nonparticipating and no dividends were distributed last year.

Question 71

The total number of shares the corporate charter permits the corporation to issue is called

A) outstanding stock.
B) authorized stock.
C) issued stock.
D) common stock.

Question 72

The Vogel and Wallis Corporation is authorized to issue 15,000 shares of 10%, $50 par value preferred stock and 60,000 shares of $5 par value common stock. Following is a narrative of selected transactions completed during the first month after incorporation.
June 1
The incorporators accepted subscriptions for 5,000 shares of preferred stock at $55 per sharE.8
The incorporators accepted subscriptions for 16,000 shares of common stock at $6 per sharE.12
Subscribers of the preferred stock paid $75,000 cash and land valued at $200,000 in full settlement of the subscriptions.
12
Subscribers of the common stock paid $21,000 cash, a $45,000 building, and equipment worth $30,000 in full settlement of the subscriptions.
Required:
Prepare the journal entries necessary for the transactions.

Question 73

All of the following are characteristics of the stockholders' equity presentation on the balance sheet EXCEPT

A) stockholders' equity is separated by source.
B) paid-in capital is separated by source.
C) preferred stock is listed before common stock.
D) retained earnings is listed before all paid-in capital.

Question 74

A company receives a subscription for 4,000 shares of $1 par value common stock at $10 per share. The journal entry for this transaction would include a debit to

A) Common Stock Subscriptions Receivable, $40,000.
B) Common Stock Subscribed, $40,000.
C) Common Stock, $40,000.
D) Premium on Common Stock, $40,000.

Question 75

After closing its books on December 31, 20--, Hilltop Corporation stockholders' equity accounts have the following balances. Complete the stockholders' equity section of the balance sheet. ​

Question 76

A subscription for 4,000 shares of $10 par value common stock was accepted. Upon receipt of the balance owed on the stock subscription, a stock certificate was issued to the subscriber. The journal entry to issue the stock certificate would include a debit to

A) Common Stock, $40,000.
B) Common Stock, $20,000.
C) Common Stock Subscribed, $40,000.
D) Common Stock Subscribed, $20,000.

Question 77

Based on the following information from Castle Keys Corporation, prepare the appropriate journal entries.
Apr. 10
Incurred organization costs totaling $4,200.
12
Issued 9,000 shares of $10 par common stock for $110,000.
25
Issued 3,500 shares of 7%, $30 par preferred stock for $115,000.
30
Issued 6,000 shares of $10 par common stock for $65,000.
May 15
Issued 3,000 shares of 7%, $30 par preferred stock for equipment with a fair market value of $93,000.
​

Question 78

The Delta Sunrise Corporation is incorporated under the laws of Mississippi. The certificate of incorporation shows that the company is authorized to issue 75,000 shares of 10%, $40 par preferred stock and 125,000 shares of $10 par common stock. Following is a narrative of selected transactions completed during the first month after incorporation. Prepare the appropriate journal entries.
Aug. 1
At the first meeting of the incorporators, subscriptions for 30,000 shares of common stock at $12 per share were accepteD.4
Received a payment of $150,000 on the common stock subscription.
12
Issued 6,000 shares of preferred stock in exchange for $100,000 cash and land with a fair market value of $160,000.
26
Received the balance in full for the common stock subscription and issued the stock certificates.
​

Question 79

Treasury stock is classified as a(n)

A) asset.
B) contra-asset.
C) stockholders' equity account.
D) contra-stockholders' equity account.

Question 80

Sanchez and Santos had the following transactions during the past year involving the purchase and sale of treasury stock.
July 14
Purchased 4,000 shares of its own $12 par common stock for $15 per sharE.17
Sold 2,000 shares of the treasury stock for $17 per sharE.29
Sold 2,000 shares of the treasury stock for $13 per sharE.Required:
Prepare the journal entries for the transactions.