Deck 20: Corporations: Formation and Capital Stock Transactions

Question 1

No-par-value stock can be sold at any price while par value stock cannot be sold for less than its par value.

Answer 1

True

Question 2

When a corporation issues stock, the amount received in excess of the par value of preferred stock is recorded in an account called Paid-in Capital in Excess of Par Value-Preferred Stock.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

Before dividends can be paid there must be a formal declaration by the board of directors.

Question 7

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

Question 8

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

Question 9

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

Question 10

The "preemptive right" enables shareholders to purchase additional shares to maintain their percentage ownership should the corporation issue additional common shares in the future.

Question 11

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

Question 12

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

Question 13

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 14

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

Question 15

Organization costs are expensed when incurred.

Question 16

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

Question 17

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

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

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

Question 20

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

Question 21

Common Stock Subscribed is an equity account.

Question 22

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

Question 23

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 24

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

Question 25

Stock that carries special privileges or rights is called stock.

Question 26

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

Question 27

The owners of a corporation are called .

Question 28

In respect to corporate debt, stockholders have liability.

Question 29

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

Question 30

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

Question 31

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 32

Ari Hightower owns 250 shares of preferred stock that is convertible into common stock at the rate of 3 shares for every share of preferred stock surrendered. If she surrenders all her preferred stock, she will receive shares of common stock.

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

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

Question 39

If a corporation sells 700 shares of 8 percent, $80 par-value preferred stock for $96 a share, the entry to record the transaction will include a credit of to the Preferred Stock account.

Question 40

Profit distribution to stockholders is called .

Question 41

A corporation has 10,000 shares of 5 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 declared a dividend of $75,000. The common stockholders will receive a dividend this year of:

A)$1.00 a share.
B)$0.50 a share.
C)$2.00 a share.
D)$4.00 a share.

Question 42

A corporation has 1,000 shares of 12 percent, $60 par-value preferred stock and 20,000 shares of $2 par-value common stock outstanding. If the board of the directors declares dividends totaling $50,000, the preferred stockholders will receive a dividend of:

A)$60.00 a share.
B)$12.00 a share.
C)$6.00 a share.
D)$7.20 a share.

Question 43

Which of the following statements is correct?

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

Question 44

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 45

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 46

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 47

The stockholders of a corporation:

A)will receive a dividend each year.
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)have no personal liability for the debts of the corporation.

Question 48

Common stockholders will receive a dividend:

A)if the corporation is reported a profit for the year.
B)if the board of directors declares a dividend and any preferred stock requirements have been met.
C)every year, whether the corporation is profitable or not.
D)even when preferred stock requirements have not been met.

Question 49

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

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

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

Question 51

A corporation is owned by:

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

Question 52

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 declares 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 53

A corporation has 5,000 shares of 6 percent, $100 par-value preferred stock and 50,000 shares of $2 par-value common stock outstanding. If the board of the directors declares dividends totaling $90,000, the common stockholders will receive a dividend of:

A)$1.20 a share.
B)$1.80 a share.
C)$2.00 a share.
D)$2.40 a share.

Question 54

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

Question 55

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 56

One disadvantage of a corporation is:

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

Question 57

A corporation has 2,000 shares of 8 percent, $50 par-value preferred stock and 20,000 shares of $5 par-value common stock outstanding. If the board of the directors declares dividends totaling$80,000, the preferred stockholders will receive a dividend of:

A)$3.50 a share.
B)$7.50 a share.
C)$4.00 a share.
D)$50.00 a share.

Question 58

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 $42,000. The policy of the corporation has been to declare dividends equal to 20% of its net income. What is the per share amount to be distributed to the common stockholders?

A)$2.10 a share.
B)$0.36 a share.
C)$1.68 a share.
D)$0.42 a share.

Question 59

A corporation has 1,000 shares of 12 percent, $60 par-value preferred stock and 20,000 shares of $2 par-value common stock outstanding. If the board of the directors declares dividends totaling $50,000, the common stockholders will receive a dividend of:

A)$2.00 a share.
B)$2.14 a share.
C)$2.50 a share.
D)$2.75 a share.

Question 60

Participating preferred stockholders:

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

Question 61

Organization costs should be:

A)debited to an intangible asset account when incurred and carried at the original amount until the business begins to earn a profit.
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)treated as an operating expense when incurred.

Question 62

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 63

The entry to record the issuance of 1,000 shares of $4 par-value common stock for $14 a share consists of a debit to Cash for $14,000 and:

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

Question 64

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 65

The outstanding stock of Adam Baum Company is composed of 25,000 shares of $100 par, 2%, cumulative preferred stock and 200,000 shares of $5 par common stock. Dividends have not been paid for the current year or the previous year. If $180,000 is to be distributed as dividends for the current year, what total amount will be distributed to the common stockholders?

A)$200,000.
B)$100,000
C)$50,000.
D)$80,000.

Question 66

The entry to record the issuance of 600 shares of $2 par-value common stock for $10 a share consists of a debit to Cash for $6,000 and:

A)a credit to Common Stock for $4,000 and a debit to Treasury Stock for $2,000.
B)a credit to Common Stock for $4,800 and a credit to Paid-in Capital in Excess of Par Value
-Common Stock for $1,200.
C)a credit to Common Stock for $1,200 and a credit to Gain on Sale of Common Stock for
$4,800.
D)a credit to Common Stock for $1,200 and a credit to Paid-in Capital in Excess of Par Value
-Common Stock for $4,800.

Question 67

The Preferred Stock account is shown in the:

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

Question 68

The outstanding stock of The Rip Torn Company is composed of 10,000 shares of $50 par, 10%, cumulative preferred stock and 50,000 shares of $20 par common stock. Dividends have not been paid for the current year or the previous two years. If $240,000 is to be distributed as dividends for the current year, what total amount will be distributed to the preferred stockholders?

A)$190,000.
B)$150,000
C)$50,000.
D)$240,000.

Question 69

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 Subscribed.

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

Question 70

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 $45,000.
D)Credit to Common Stock for $30,000.

Question 71

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 72

San Martin 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 $2.50 per share. Calculate the total dividends paid.

Question 73

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:

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

Question 74

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 75

The transfer of stock between shareholders is:

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

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

Question 77

The outstanding stock of Adam Baum Company is composed of 25,000 shares of $100 par, 2%, cumulative preferred stock and 200,000 shares of $5 par common stock. Dividends have not been paid for the current year or the previous year. If $180,000 is to be distributed as dividends for the current year, what total amount will be distributed to the preferred stockholders?

A)$200,000.
B)$100,000
C)$50,000.
D)$80,000.

Question 78

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 925 shares of the preferred stock. During the current year she decides to convert 250 shares into common stock. How many shares of common stock will she receive?

Question 79

For the year just ended, a company reports net income of $3,200,000. There are 750,000 shares authorized, 600,000 shares issued and 500,000 shares of common stock outstanding. The company has no preferred stock. If the board of directors declares a $1 per share dividends, the total amount of dividends paid is:

A)$750,000.
B)$600,000
C)$500,000.
D)$250,000.

Question 80

The entry to record the issuance of 2,000 shares of $1 par-value common stock for $8 a share consists of a debit to Cash for $16,000 and:

A)a credit to Common Stock for $2,000 and a credit to Paid-in Capital in Excess of Par Value
-Common Stock for $14,000.
B)a credit to Common Stock for $2,000 and a credit to Gain on Sale of Common Stock for
$14,000.
C)a credit to Common Stock for $14,000 and a credit to Treasury Stock for $2,000.
D)a credit to Common Stock for $16,000