Deck 13: Introduction to Corporations

Question 1

Income tax expense is calculated based on Profit from Operations from the income statement.

Answer 1

False

Question 2

The legal capital is the total of contributed capital and retained earnings.

Answer 2

False

Question 3

Shareholders' liability is generally unlimited; therefore, creditors have recourse to shareholders' personal assets as well as corporate assets.

Answer 3

False

Question 4

Retained earnings are the cumulative profit less losses and amounts distributed to shareholders since incorporation.

Question 5

Dividends paid on common shares are shown as Dividends Expense, in the Other Expenses section of the Income Statement.

Question 6

When convertible preferred shares are converted into common shares, the company uses the current fair value to record the journal entry.

Question 7

The redemption or call features applies to preferred shares.

Question 8

Dividends in arrears are shown as a liability on the balance sheet.

Question 9

Return on equity is calculated by dividing average shareholders' equity by profit.

Question 10

When shares are issued for noncash assets, the cost of the assets acquired is always equal to the fair value of the shares issued.

Question 11

All of the following items are characteristics of a corporation except:

A) separate legal existence.
B) transferable ownership rights.
C) limited life.
D) ability to acquire capital.

Question 12

If a company has 300,000 common shares authorized, and has 250,000 shares issued at $3 a share, the Common Shares account would have a balance of:

A) $250,000.
B) $300,000.
C) $750,000.
D) $900,000.

Question 13

A public company issues 10,000 shares on November 1 to purchase equipment with a value of $72,000. Assume the company's shares are actively traded with a value of $7 per share. Which statement is true?

A) Equipment is debited for $72,000.
B) Contributed Surplus is credited for $2,000.
C) A gain on sale is credited for $2,000.
D) Common Shares is credited for $70,000.

Question 14

Preferred shares are least likely to have which characteristic?

A) The right of the holder to vote at shareholders' meetings.
B) The right of the corporation to redeem or retire the shares.
C) Preference as to assets upon liquidation of the corporation.
D) Preference as to dividends.

Question 15

The Preferred Shares account has a balance of $100,000. There are 500 convertible preferred shares, each convertible to 4 common shares. On a day that the preferred shares have an average cost of $200 and a market value of $230, one half of the preferred shares are converted to common shares. Common shares are trading at $60. Which statement is true?

A) Retained Earnings will be debited by $2,500.
B) The Common Shares account will be credited for $50,000.
C) An income statement account, Loss on Conversion, will be debited by $2,500.
D) The Common Shares account will be credited for $60,000.

Question 16

List the three requirements that must exist for a corporation to pay a cash dividend.

Question 17

Record journal entries for each of the following unrelated transactions:
a. On July 5, Adobe Corporation issued 500 of its common shares for a total of $10,000.
b. On June 1, Baker Corporation issued 1,000 of its preferred shares in exchange for land valued at $50,000. Baker's shares are not widely held or regularly traded. Four years ago, 500 preferred shares were issued for $35 a share.
c. On March 3, Colton Corporation has a Common Share account balance of $200,000, and has 20,000 shares issued. For the first time ever, Colton reacquired and cancelled 1,000 of its common shares, paying $12 a share.
d. Dagmar Corporation has 10,000 convertible preferred shares that were issued for a total of $500,000. Each preferred share is convertible into 3 common shares. On April 8, when the market values of the preferred and common shares are $60 and $24 respectively, 2,000 preferred shares are converted.
e. On April 12, Hobson Corporation declared a quarterly dividend of $0.05 per share on its 200,000 common shares. The dividend will be paid on Apr 29, to the shareholders of record on April 19. Prepare the journal entry necessary for each date.

Question 18

List two advantages that the corporate form of organization has over a proprietorship or a partnership.