Deck 11: Corporations: Organization, Stock Transactions, and Dividends

Question 1

A corporation is a separate entity for accounting purposes but not for legal purposes.

Answer 1

False

Question 2

When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds.

Answer 2

False

Question 3

The issuance of common stock affects both paid-in capital and retained earnings.

Answer 3

False

Question 4

Double taxation is a disadvantage of a corporation because the corporation has to pay income taxes at twice the rate applied to partnerships.

Question 5

Twenty percent of all businesses in the United States are corporations, and they account for 80% of the total business dollars generated.

Question 6

For accounting purposes, stated value is treated the same way as par value.

Question 7

While some businesses have been granted charters under state laws, most businesses receive their charters under federal laws.

Question 8

The main source of paid-in capital is from issuing stock.

Question 9

The par value of common stock must always be equal to its market value on the date the stock is issued.

Question 10

The balance in Retained Earnings should be interpreted as representing surplus cash left over for dividends.

Question 11

The financial loss that each stockholder in a corporation can incur is usually limited to the amount invested by the stockholder.

Question 12

Organizational expenses are classified as intangible assets on the balance sheet.

Question 13

The net increase or decrease in Retained Earnings for a period is recorded by closing entries.

Question 14

The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business.

Question 15

Under the Internal Revenue Code, corporations are required to pay federal income taxes.

Question 16

Retained Earnings represents past net income less past dividends, therefore any balance in this account would be listed on the income statement.

Question 17

A deficit in Retained Earnings is reported in the stockholders' equity section of the balance sheet.

Question 18

The amount of capital paid in by the stockholders of the corporation is called legal capital.

Question 19

The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares issued.

Question 20

The initial stockholders of a newly formed corporation are called directors.

Question 21

A large retained earnings account means that there is cash available to pay dividends.

Question 22

When the board of directors declares a cash or stock dividend, this action decreases retained earnings.

Question 23

A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

Question 24

The declaration and issuance of a stock dividend does not affect the total amount of a corporation's assets, liabilities, or stockholders' equity.

Question 25

When a corporation issues stock at a premium, it reports the premium as an other income item on the income statement.

Question 26

Paid-in capital may originate from real estate transactions.

Question 27

When no-par stock is issued, Common Stock is credited for the selling price of the stock issued.

Question 28

One of the prerequisites to paying a cash dividend is sufficient retained earnings.

Question 29

The day on which the board of directors of the corporation distributes a dividend is called the declaration date.

Question 30

The declaration of a stock dividend decreases a corporation's stockholders' equity and increases its liabilities.

Question 31

When common stock is issued in exchange for land, the land should be recorded in the accounts at the par value of the stock issued.

Question 32

If 50,000 shares are authorized, 41,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 43,000.

Question 33

Before a stock dividend can be declared or paid, there must be sufficient cash.

Question 34

If a corporation is liquidated, preferred stockholders are paid before the creditors and before the common stockholders.

Question 35

A large public corporation normally uses registrars and transfer agents to maintain records of the stockholders.

Question 36

If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividends per share would be $4.

Question 37

The par value of stock is an assigned per share amount defined in many states as legal capital.

Question 38

The declaration of a cash dividend decreases a corporation's stockholders equity and decreases its assets.

Question 39

Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends.

Question 40

Cash dividends become a liability to a corporation on the date of record.

Question 41

Treasury Stock is listed in the stockholders' equity section on the balance sheet.

Question 42

A restriction/appropriation of retained earnings establishes cash assets that are set aside for a specific purpose.

Question 43

A corporation has 10,000 shares of $100 par stock outstanding. If the corporation issues a 5-for-1 stock split, the number of shares outstanding after the split will be 40,000.

Question 44

The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of additional shares, is called a stock split.

Question 45

The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares.

Question 46

If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $15,000.

Question 47

Under the cost method, when treasury stock is purchased by the corporation, the par value and the price at which the stock was originally issued are important.

Question 48

A sale of treasury stock may result in a decrease in paid-in capital. All decreases should be charged to Paid-In Capital from Sale of Treasury Stock.

Question 49

The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders' equity.

Question 50

A prior period adjustment should be reported as an adjustment to the retained earnings balance at the beginning of the period in which the adjustment was made.

Question 51

If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported on the income statement.

Question 52

The retained earnings statement may be combined with the income statement.

Question 53

If paid-in-capital in excess of par/preferred stock is $30,000, preferred stock is $200,000, paid-in capital in excess of par/common stock is $20,000, common stock is $525,000, and retained earnings is $105,000 deficit), the total stockholders' equity is $880,000.

Question 54

The cost method of accounting for the purchase and sale of treasury stock is a commonly used method.

Question 55

The amount of a corporation's retained earnings that has been restricted/appropriated should be reported in the notes to the financial statements.

Question 56

The stock dividends distributable account is listed in the current liability section of the balance sheet.

Question 57

A corporation has 12,000 shares of $20 par stock outstanding that has a current market value of $150. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $50.

Question 58

Cash dividends are normally paid on shares of treasury stock.

Question 59

A stock split results in a transfer at market value from retained earnings to paid-in capital.

Question 60

If a company has preferred stock, the preferred stock dividend is added to net income when computing earnings per common share.

Question 61

Under the corporate form of business organization,

A) ownership rights are easily transferred
B) a stockholder is personally liable for the debts of the corporation
C) stockholders' acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation
D) stockholders wishing to sell their corporate shares must get the approval of other stockholders

Question 62

Which one of the following would not be considered an advantage of the corporate form of organization?

A) government regulation
B) separate legal existence
C) continuous life
D) limited liability of stockholders

Question 63

Nebraska Inc. issues 3,000 shares of common stock for $45,000. The stock has a stated value of $10 per share. The journal entry to record the stock issuance would include a credit to Common Stock for

A) $30,000
B) $45,000
C) $15,000
D) $3,000

Question 64

Which of the following is not a characteristic of a corporation?

A) The financial loss that a stockholder may suffer from owning stock in a public company is limited.
B) Cash dividends paid by a corporation are deductible as expenses by the corporation.
C) A corporation can own property in its name.
D) Corporations are required to file federal income tax returns.

Question 65

Characteristics of a corporation include

A) shareholders who are mutual agents
B) direct management by the shareholders owners)
C) its inability to own property
D) shareholders who have limited liability

Question 66

The term deficit is used to refer to a debit balance in which of the following accounts of a corporation?

A) Retained Earnings
B) Treasury Stock
C) Organizational Expenses
D) Common Stock

Question 67

The price at which a stock can be sold depends upon a number of factors. Which statement below is not one of those factors?

A) the financial condition, earnings record, and dividend record of the corporation
B) investor expectations of the corporation's earning power
C) how high the par value is
D) general business and economic conditions and prospects

Question 68

Which of the following is not true of a corporation?

A) It may enter into binding legal contracts in its own name.
B) It may sue and be sued.
C) The acts of its owners bind the corporation.
D) It may buy, own, and sell property.

Question 69

The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to

A) Organizational Expenses
B) Goodwill
C) Common Stock
D) Cash

Question 70

One of the main disadvantages of the corporate form is the

A) professional management
B) double taxation of dividends
C) charter
D) requirement to stock

Question 71

Stockholders' equity

A) is usually equal to cash on hand
B) includes paid-in capital and liabilities
C) includes retained earnings and paid-in capital
D) is shown on the income statement

Question 72

Those most responsible for the major policy decisions of a corporation are the

A) management
B) board of directors
C) employees
D) stockholders

Question 73

Which of the following is not a right possessed by common stockholders of a corporation?

A) the right to vote in the election of the board of directors
B) the right to receive a minimum amount of dividends
C) the right to sell their stock to anyone they choose
D) the right to share in assets upon liquidation

Question 74

Which of the following statements concerning taxation is accurate?

A) Corporations pay federal income taxes but not state income taxes.
B) Corporations pay federal and state income taxes.
C) Only the owners must pay taxes on corporate income.
D) Corporations pay income taxes but their owners do not.

Question 75

The par value per share of common stock represents the

A) minimum selling price of the stock established by the articles of incorporation
B) minimum amount the stockholder will receive when the corporation is liquidated
C) dollar amount assigned to each share
D) amount of dividends per share to be received each year

Question 76

A disadvantage of the corporate form of business entity is

A) mutual agency for stockholders
B) unlimited liability for stockholders
C) corporations are subject to more governmental regulations
D) the ease of transfer of ownership

Question 77

The ability of a corporation to obtain capital is

A) less than the ability of a partnership
B) about the same as the ability of a partnership
C) restricted because of the limited life of the corporation
D) enhanced because of limited liability and ease of share transferability

Question 78

The excess of issue price over par of common stock is termed an)

A) discount
B) income
C) deficit
D) premium

Question 79

The state charter allows a corporation to issue only a certain number of shares of each class of stock. This amount of stock is called

A) treasury stock
B) issued stock
C) outstanding stock
D) authorized stock

Question 80

The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 40,000 shares were originally issued and 10,000 were subsequently reacquired. What is the number of shares outstanding?

A) 10,000
B) 40,000
C) 30,000
D) 50,000