Deck 9: Stockholders Equity

Question 1

Double taxation means that corporate earnings are taxed at the corporate level and a second time when distributed to the shareholders as dividends.

Answer 1

True

Question 2

A corporation is a separate legal entity that exists apart from its owners.

Answer 2

True

Question 3

All corporations have common stock, but few have preferred stock.

Answer 3

True

Question 4

Preferred shareholders stand to benefit the most if the corporation succeeds because they take the most risk by investing in preferred stock.

Question 5

The stockholders' ownership interest in the assets of the corporation is stockholders' equity.

Question 6

Corporations have continuous lives regardless of changes in their ownership.

Question 7

Partnerships have the ability to raise more capital than corporations.

Question 8

Corporations have continuous lives regardless of changes in their ownership.

Question 9

In a corporation, the ownership is separate from the management.

Question 10

The amount of stock the state charter allows a corporation to issue is called authorized stock.

Question 11

Management's goal is to maximize the firm's value for the stockholders.

Question 12

Since owners of a corporation have limited liability, a corporation is always the best way to organize a new business.

Question 13

One unique advantage given to common stockholders over preferred stockholders is the right to the company's assets if the company is dissolved.

Question 14

Stockholders have unlimited liability, since there is no personal obligation of a stockholder for the debts of the corporation.

Question 15

Which of the following is NOT an advantage of forming a corporation as compared to organizing as a partnership or proprietorship?

A)Ease of transferring ownership
B)Limited taxation
C)Limited liability of stockholders
D)Corporation is separate legal entity distinct from its owners

Question 16

Legal capital is an arbitrary amount assigned by a company to a share of stock.

Question 17

Paid-in capital, as shown on a corporate balance sheet, includes the stock accounts and any additional paid-in capital.

Question 18

No-par stock does not have a par value, but can have a stated value, which makes it similar to par value stock.

Question 19

The account "Stock and capital" appears on the balance sheet with other paid-in capital accounts.

Question 20

Preferred stock is a hybrid between common stock and long-term debt.

Question 21

Which of the following is a disadvantage of the corporate form of business organization?

A)Governmental regulation at both the federal and state levels
B)Difficulty in transferring ownership
C)Unlimited liability
D)Mutual agency

Question 22

Shareholder rights may include:

A)the right to an equal share of dividends.
B)the right to vote for managers of the corporation.
C)the right to proportionate share of assets in the event of a liquidation.
D)all of the above.

Question 23

The basic unit of ownership for a corporation is:

A)capital.
B)dividends.
C)stock.
D)retained earnings.

Question 24

Contributed capital is also known as:

A)common stockholders' equity.
B)paid-in capital.
C)retained earnings.
D)total stockholders' equity.

Question 25

Which of the following types of business organizations terminates when its ownership structure changes?

A)Proprietorships only
B)Proprietorships and corporations
C)Partnerships and proprietorships
D)Partnerships and corporations

Question 26

Since a corporation is a separate legal entity:

A)it exists apart from its owners.
B)it has many of the same rights as individuals have.
C)it must be formed under state law.
D)all of the above apply.

Question 27

The chairperson of the board of directors has the title of:

A)President.
B)Chief Executive Officer (CEO).
C)Chief Financial Officer (CFO).
D)Chief Operating Officer (COO).

Question 28

The number of shares of stocks outstanding is the same as the number of stock that is:

A)issued to the shareholders.
B)authorized by the board of directors.
C)currently in the hands of the stockholders.
D)ready to be sold to shareholders.

Question 29

Legal capital is the:

A)amount owed to owners.
B)amount owed to creditors.
C)par value of authorized stock.
D)par value of stock issued.

Question 30

Paid-in capital is the amount of stockholders' equity that the:

A)corporation has earned through profitable operations.
B)stockholders have contributed to the corporation, less the preferred stock.
C)stockholders have contributed to the corporation, less the amount of stockholders' equity that the corporation has given back to the stockholders.
D)stockholders have contributed to the corporation.

Question 31

Limited liability of a corporation means that:

A)shareholders are not responsible for the decisions of management.
B)the corporation is not required to earn net income.
C)the corporation is not required to pay dividends.
D)a shareholders' potential loss is limited to their investment in the corporation.

Question 32

Stockholders' equity is divided into:

A)retained earnings and common stock.
B)retained earnings and preferred stock.
C)retained earnings and paid-in-capital.
D)common stock and preferred stock.

Question 33

Double taxation means that the:

A)corporation pays tax on its earnings and the shareholders pay tax on dividends.
B)corporation pays income tax and unemployment taxes.
C)earnings of a corporation are subject to state and federal income taxes.
D)shareholders tax rate is twice the amount of the corporate tax rate.

Question 34

A corporation is formed when the incorporators obtain:

A)a charter from the state.
B)a board of directors.
C)stock.
D)officers.

Question 35

The constitution for governing a corporation is its:

A)charter.
B)bylaws.
C)stockholders.
D)articles of incorporation.

Question 36

The group elected by the stockholders to set policy for a corporation and to appoint its officers is the:

A)incorporators.
B)directors.
C)board of directors.
D)audit committee.

Question 37

The right to maintain one's proportionate ownership in the corporation is called the:

A)voting right.
B)liquidation right.
C)preemptive right.
D)dividend right.

Question 38

The ______________ own the corporation, but the _________________, who are elected by the stockholders appoint officers to manage the business.

A)stockholders, officers
B)stockholders, board of directors
C)officers, board of directors
D)board of directors, officers

Question 39

Which of the following is NOT a characteristic that distinguishes corporations from proprietorships and partnerships?

A)Corporations have continuous lives regardless of changes in ownership.
B)Corporations have mutual agency.
C)Corporations are separate legal entities apart from the owners.
D)Corporate earnings are subject to double taxation.

Question 40

A corporation:

A)cannot own property.
B)is managed by the shareholders.
C)has owners who have mutual agency.
D)has owners who have limited liability

Question 41

If a corporation issues only one class of stock, it must be:

A)contributed.
B)common.
C)preferred
D)par value.

Question 42

A corporation will often utilize the services of an underwriter to sell its stock.

Question 43

The price that the stockholder pays to acquire stock from the corporation is the:

A)authorized price.
B)issue price.
C)par price.
D)stated price.

Question 44

When a company sells its stock for an asset other than cash, the asset's prior book value is used to record the value of the stock.

Question 45

Which statement is TRUE regarding preferred stock?

A)The dividends paid on preferred stock are deductible on the corporation's tax return.
B)The company has an obligation to repay the preferred stock.
C)The obligation to pay dividends occurs only after the board of directors declares the dividends.
D)All of the above are true.

Question 46

A Gain on Issue of Common Stock indicates that the stock was sold for more than its par value.

Question 47

Because a company is dealing with its own stockholders, issuance of stock is not a gain or income to the company.

Question 48

Assets received in exchange for the issuance of stock should be recorded at:

A)book value of the asset exchanged.
B)fair market value, as determined by a good-faith estimate from independent appraisers.
C)historical cost.
D)historical cost less accumulated depreciation taken to date.

Question 49

Companies that have true no-par stock have no additional paid-in capital account.

Question 50

Another name for paid-in capital in excess of par is additional paid-in capital.

Question 51

Preferred stockholders:

A)receive dividends before common shareholders.
B)receive assets upon liquidation before common shareholders.
C)have basic stockholders' rights unless a right is specifically denied.
D)have all of the above.

Question 52

Dividends are declared by the:

A)stockholders.
B)CEO.
C)board of directors.
D)CFO.

Question 53

How does an investment of cash in a corporation affect the corporation's balance sheet?

A)It increases assets and decreases stockholders' equity.
B)It increases assets and increases stockholders' equity.
C)It increases assets and increases liabilities.
D)It increases assets and decreases liabilities.

Question 54

When a company issues stock at a price above its par value:

A)assets decrease and equity increases.
B)assets increase and equity decreases.
C)assets and equity increase by the same amount.
D)assets and equity increase by different amounts.

Question 55

Most companies set par value high and issue common stock for a price below par value.

Question 56

The entry to sell 100 shares of $1 par value common stock at $5 per share would include a credit to Paid-in Capital in Excess of Par-Common for $400.

Question 57

The amount of stockholders' equity that the corporation has earned through profitable operation of the business and has not given back to stockholders is:

A)outstanding stock.
B)legal capital.
C)treasury stock.
D)retained earnings.

Question 58

The arbitrary amount assigned by a company to a share of its stock is the:

A)par value.
B)capital value.
C)no-par value.
D)total value.

Question 59

When one stockholder sells his shares of stock to another stockholder, the corporation's equity will increase.

Question 60

Assets other than cash should be recorded at their current fair market value when received from the issuance of stock.

Question 61

A company issues one hundred shares of no-par common stock with a $10 stated value for $17 per share. The entry to record this issuance includes a:

A)debit to Paid-in Capital in Excess of Stated Value-Common for $1,000.
B)credit to Paid-in Capital in Excess of Stated Value-Common for $700.
C)credit to Common Stock for $1,700.
D)credit to Common Stock for $700.

Question 62

One reason a company will purchase treasury stock is to help avoid a takeover of the company by another shareholder.

Question 63

Treasury stock reduces the number of shares outstanding.

Question 64

The difference between the issue price of the stock and the par value of the stock is:

A)par value.
B)market value.
C)treasury stock.
D)additional paid-in capital.

Question 65

The entry to record the issuance of 1,000 shares of $1 par value common stock at $10 per share includes a:

A)credit to Common Stock for $10,000.
B)debit to Common Stock for $1,000.
C)credit to Paid-in Capital in Excess of Par Value-Common for $9,000.
D)debit to Paid-in Capital in Excess of Par Value-Common for $1,000.

Question 66

The entry to record common stock issued at its par value includes a:

A)debit to the Common Stock account.
B)debit to Retained Earnings.
C)credit to the Common Stock account.
D)credit to Retained Earnings.

Question 67

Accounting for no-par common stock with a stated value is identical to accounting for:

A)par value stock
B)no-par value stock.
C)treasury stock.
D)preferred stock.

Question 68

A corporation's own stock that it has issued and later reacquired is called:

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

Question 69

The purchase of treasury stock has the opposite effect of issuing stock.

Question 70

Both the par value of the stock and the additional paid-in capital are part of:

A)retained earnings.
B)legal capital.
C)paid-in capital.
D)stated value.

Question 71

Golden Eagle Corporation issues 100 shares of $10 par value common stock for $50 per share. This transaction will include a credit to Common Stock for:

A)$1,000 and a Gain on Issue of Common Stock for $4,000.
B)$1,000 and a credit to Retained Earnings for $4,000.
C)$1,000 and a credit to Paid-in Capital in Excess of Par for $4,000.
D)$5,000.

Question 72

When reporting stockholders' equity on the balance sheet, a corporation lists the accounts in the following order:

A)Common stock, preferred stock, retained earnings
B)Preferred stock, common stock, retained earnings
C)Retained earnings, preferred stock, common stock
D)There is no preferred order.

Question 73

When convertible preferred stock is converted into common stock:

A)a gain or loss can be recognized.
B)the preferred stock is removed from the books and the common stock accounts are credited for the prior book value of the preferred.
C)cash is debited.
D)none of the above occur.

Question 74

A corporation has 10,000 shares of stock authorized, 8,000 shares issued and 7,000 shares outstanding. Which of the following statements is TRUE?

A)There are 1,000 shares of treasury stock.
B)10,000 shares have been sold.
C)There are 7,000 shares of treasury stock.
D)The amount of treasury stock cannot be determined from the information given.

Question 75

When a company issues it stock, it:

A)can recognize a gain, but not a loss.
B)can recognize a loss, but not a gain.
C)cannot recognize a gain or a loss.
D)can recognize a gain or a loss.

Question 76

The entry to record the issuance of 13,000 shares of no-par value common stock at $25 per share includes a:

A)credit to Common Stock for $325,000.
B)debit to Retained Earnings for $325,000.
C)credit to Retained Earnings for $325,000.
D)credit to Paid-in Capital in Excess of Par Value-Common for $325,000.

Question 77

Jenny's Lawn Service issued 100 shares of $10 par value stock and received a lawnmower with a fair market value of $2,500. The entry to record this transaction would include:

A)a debit to Equipment for $2,500.
B)a credit to Common Stock for $1,000.
C)a credit to Paid-in Capital in Excess of Par-Common Stock for $1,500
D)all of the above.

Question 78

Falcon Crest Corporation issues 100 shares of no-par common stock for $10 per share. The stock has a stated value of $1 per share. This transaction will include a credit to Common Stock for:

A)$100 and a Gain on Issue of Common Stock for $900.
B)$100 and a credit to Retained Earnings for $900.
C)$100 and a credit to Paid-in Capital in Excess of Stated Value for $900.
D)$1,000 and no entry to Paid-in Capital.

Question 79

Hawkeye Corporation issues 100 shares of no-par value common stock for $20 per share. This transaction will include a credit to Common Stock for:

A)$1,000 and a Gain on Issue of Common Stock for $1,000.
B)$1,000 and a credit to Retained Earnings for $1,000.
C)$1,000 and a credit to Paid-in Capital for $1,000.
D)$2,000 and no entry to Paid-in Capital in Excess of Par or Stated Value.

Question 80

When 100 shares of $10 par value Common Stock are issued at $53 per share, Paid-in Capital in Excess of Par value-Common will:

A)increase $1,000.
B)increase $4,300.
C)increase $5,300.
D)not be affected.