Deck 13: Corporations

Question 1

A corporation is a separate legal entity that is organized independently of its owners.

Answer 1

True

Question 2

Following is a list of advantages and disadvantages of the corporate form of business.Identify each characteristic as either an advantage (A)or a disadvantage (D).
$$\begin{array} { | l | l | } \hline \text { Corporate Characteristic } & \begin{array} { l } \text { Advantage (A) or } \\\text { Disadvantage (D) }\end{array} \\\hline \begin{array} { l } \text { Entity can raise more money than a partnership or sole } \\\text { proprietor. }\end{array} & \\\hline \text { Startup costs are higher than other business forms. } & \\\hline \text { Stockholders' liability is limited. } & \\\hline \begin{array} { l } \text { There is no mutual agency among the stockholders and } \\\text { the corporation. }\end{array} & \\\hline\end{array}$$

Answer 2

$$\begin{array} {| l | l | } \hline \text { Corporate Characteristic } & \begin{array} { l } \text { Advantage (A) or } \\\text { Disadvantage (D) }\end{array} \\\hline \begin{array} { l } \text { Entity can raise more money than a partnership or sole } \\\text { proprietor. }\end{array} & \text { A } \\\hline \begin{array} { l } \text { Startup costs are higher than other business forms. } \\\end{array} & \text { D } \\\hline \begin{array} { l } \text { Stockholders' liability is limited. }\end{array} & \text { A } \\\hline \begin{array} { l } \text { There is no mutual agency among the stockholders and } \\\text { the corporation. }\end{array} & \text { A } \\\hline\end{array}$$

Question 3

The stock of public corporations cannot be purchased on a stock exchange.

Answer 3

False

Question 4

Both common and preferred stock carry the same degree of investment risk for the stockholder.

Question 5

Which of the following is TRUE of a corporation?

A) A corporation cannot be privately held.
B) The earnings of a corporation may be subject to double taxation.
C) A corporation has a limited life.
D) The stockholders of a corporation have unlimited liability for the corporation's debt.

Question 6

Jefferson Anderson is a sole proprietor of a successful business.He is interested in incorporating to protect his personal assets.What are some disadvantages of organizing as a corporate entity?

Question 7

Which of the following is an advantage of the corporate form of business?

A) less degree of government regulation
B) limited liability of stockholders
C) separation of ownership and management
D) low start-up costs

Question 8

Following is a list of advantages and disadvantages of the corporate form of business.Identify each characteristic as either an advantage (A)or a disadvantage (D).
$$\begin{array} { | l | l | } \hline \text { Corporate Characteristic } & \begin{array} { l } \text { Advantage (A) or } \\\text { Disadvantage (D) }\end{array} \\\hline \text { Entity has continuous life. } & \\\hline \text { Exposure to double taxation is evident. } & \\\hline \text { Government regulation is expensive. } & \\\hline \text { Transfer of ownership is easy. } & \\\hline\end{array}$$

Question 9

Most well-known companies are corporations and tend to be large multinational businesses.

Question 10

Which of the following statements is TRUE of a corporation?

A) Shareholders can be required to pay debts of the corporation.
B) Shares of stock cannot be readily purchased and sold by investors on an organized stock exchange.
C) Shareholders are authorized to sign contracts or make business commitments on behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay income tax on the dividends received.

Question 11

Which of the following corporate characteristics is a disadvantage of a corporation?

A) Stockholders have limited liability.
B) A corporation has a continuous life.
C) There is no mutual agency between the stockholders and the corporation.
D) Earnings of a corporation may be subject to double taxation.

Question 12

A corporation is a business organized under federal law that is a separate legal entity.

Question 13

Double taxation occurs when corporations make dividend payments to stockholders.

Question 14

Preferred stockholders receive a dividend preference over common stockholders.

Question 15

Trent Williams is a sole proprietor of a successful business.He is interested in incorporating to protect his personal assets.Which advantage of incorporation is most applicable? What are other advantages of organizing as a corporate entity?

Question 16

Higher start-up costs and expensive government regulations are disadvantages of corporations.

Question 17

Stockholders of a corporation are not personally liable for the corporation's debt.

Question 18

Lack of mutual agency is best described as which of the following?

A) The liabilities of the corporation cannot be extended to the personal assets of the stockholder.
B) Shares of stock can be readily purchased and sold by investors on an organized stock exchange.
C) Stockholders are not authorized to sign contracts or make business commitments on behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay income tax on corporate dividends.

Question 19

Paid-in capital is externally generated capital and results from transactions with outsiders.

Question 20

Which of the following statements regarding corporations is incorrect?

A) Corporations dominate business activity in the United States.
B) Corporations are businesses organized under state law and do not have an existence that is separate from their owners.
C) Most well-known corporations tend to be large multinational businesses.
D) Corporations are separate legal entities.

Question 21

Paid-in capital and retained earnings are internally generated equity.

Question 22

The retained earnings of a corporation is ________.

A) internally generated equity that is earned by profitable operations that is not distributed to stockholders
B) externally generated equity that is contributed by shareholders
C) externally generated equity that is acquired from banks and other creditors
D) internally generated equity that is received from employee stock purchases

Question 23

The par value of stock is ________.

A) the current selling price of stock
B) the highest price for which a share can sell
C) the price paid if the corporation purchases its own stock back
D) the amount assigned by a company to a share of its stock

Question 24

List the four basic rights of stockholders.

Question 25

Which of the following is a basic right of stockholders?

A) Stockholders may sell their stock back to the company if they wish.
B) Stockholders may authorize a business contract on behalf of the corporation.
C) Stockholders may receive dividends from corporate earnings.
D) Stockholders may determine the issue price of common stock.

Question 26

Preferred stockholders ________.

A) receive a dividend preference over common stockholders
B) are guaranteed that they will not have a loss on their investment
C) generally have voting rights
D) have more investment risk compared to common stockholders

Question 27

The two basic sources of stockholders' equity are ________.

A) common stock and bonds
B) common stock and preferred stock
C) paid-in capital and retained earnings
D) no-par and stated value stock

Question 28

Paid-in capital consists of ________.

A) amounts received from customers
B) amounts raised by issuing bonds or preferred stocks
C) earnings generated by the corporation
D) amounts received from stockholders in exchange for stock

Question 29

Stated value stock is no-par stock that has been assigned an amount similar to par value.

Question 30

In the event of a corporate liquidation,preferred stockholders ________.

A) are guaranteed to receive a full refund of the stock purchase price
B) have first claim on remaining corporate assets after debts are paid
C) are guaranteed to receive the par value of the preferred stock
D) may retain their proportionate share of voting rights

Question 31

The corporate charter identifies the maximum number of shares of stock the corporation may issue,which is called 'available for issue' stock.

Question 32

The par value of a stock has no relation to the market value.

Question 33

For accounting purposes,par value stock is treated the same as stated value stock except for the account names.

Question 34

Which of the following is a TRUE statement?

A) Stockholders are guaranteed annual dividends.
B) Stockholders receive their proportionate share of any assets remaining after the corporation pays its debts and liquidates.
C) Stockholders may authorize a business contract on behalf of the corporation.
D) Stockholders may vote only if they physically attend the annual stockholders' meeting.

Question 35

Preferred stockholders ________.

A) are guaranteed that they will not have a loss on their investment
B) are guaranteed to receive an annual dividend payment
C) receive a set percentage of corporation net income
D) receive a dividend preference over common stockholders

Question 36

Outstanding stock represents shares of stock that ________.

A) are held by the stockholders
B) give the owners certain advantages
C) have been authorized by state law
D) have been issued but may or may not be held by stockholders

Question 37

Par value is an arbitrary amount that is assigned by the state when the corporate charter is issued.

Question 38

Preferred stock is stock ________.

A) that sells for a high price
B) that is distributed to employees as annual bonuses
C) that is distributed by corporations to avoid liquidation
D) that gives its owners certain advantages over common stockholders

Question 39

Which of the following types of stock has less investment risk?

A) common stock
B) par value stock
C) no-par stock
D) preferred stock

Question 40

Retained earnings represents amounts received from stockholders of a corporation in exchange for stock.

Question 41

Milton,Inc.had the following transactions in 2019,its first year of operations: • Issued 8000 shares of common stock.Stock has par value of $0.01 per share and was issued at $40.00 per share.
• Earned net income of $200,000.
• Paid dividends of $8.00 per share.
At the end of 2019,what is total stockholders' equity?

A) $320,000
B) $456,000
C) $136,000
D) $584,000

Question 42

When a corporation issues stock at par value,the Cash account is debited and the Common Stock account is credited for an amount equal to the number of shares issued times the par value per share.

Question 43

Bentley Corporation received cash from issuing 17,000 shares of common stock at par on January 1,2018.The stock has a par value of $0.05 per share.Which is the correct journal entry to record this transaction?

A) Cash is debited for $850, and Common Stock-$0.05 Par Value is credited for $850.
B) Cash is credited for $17,000 and Common Stock-$0.05 Par Value is debited for $17,000.
C) Paid-In Capital in Excess of Par-Common is debited for $16,150, and Common Stock-$0.05 Par Value is credited for $16,150.
D) Cash is debited for $17,000, Common Stock-$0.05 Par Value is credited for $850, and Paid-In Capital in Excess of Par-Common credited for $16,150.

Question 44

The issue price is the price the stock initially sells for the first time it is sold.

Question 45

Midtown,Inc.had the following transactions in 2018,its first year of operations: • Issued 31,000 shares of common stock.Stock has par value of $1.00 per share and was issued at $20.00 per share.
• Earned net income of $70,000.
• Paid no dividends.
At the end of 2018,what is total stockholders' equity?

A) $31,000
B) $690,000
C) $620,000
D) $70,000

Question 46

Define the following terms:
$$\begin{array} { | l | l | } \hline \text { Term } & \text { Definition } \\\hline \text { Authorized stock } & \\\hline \text { Preferred stock } & \\\hline \text { Stated value stock } & \\\hline\end{array}$$

Question 47

When a company issues stock at an amount greater than the par value,a gain is recorded for the difference between the issue price and the par value.

Question 48

Define the following terms:
$$\begin{array} { | l | l | } \hline \text { Term } & \text { Definition } \\\hline \text { Putstanding stock } & \\\hline \text { Paid-in capital } & \\\hline \text { Par value } & \\\hline\end{array}$$

Question 49

Paid-in capital in excess of par is recorded when no-par stock is issued.

Question 50

Most corporations set par value low and issue common stock at a premium.

Question 51

Usually,the issue price exceeds par value because par value is normally set as a percentage of the issue price of the stock.

Question 52

An underwriter usually assumes some of the risk of issuing stock by agreeing to buy all of the stock the firm cannot sell to its clients.

Question 53

Regarding the issuance of stock,which of the following statements is incorrect?

A) Large corporations cannot finance all their operations through borrowing, so they raise capital by issuing stock.
B) A company can sell its stock directly to stockholders, or it can use the services of the state's Securities and Exchange Commission.
C) The issue price is the amount the corporation receives from issuing its stock.
D) Large corporations need huge quantities of money.

Question 54

Which of the following is included in the entry to record the issuance of 14,000 shares of $7 par value common stock at $21 per share for cash?

A) Cash is debited for $294,000.
B) Common Stock is debited for $98,000.
C) Common Stock is credited for $294,000.
D) Paid-In Capital in Excess of Par-Common is debited for $196,000.

Question 55

Belton,Inc.had the following transactions in 2018,its first year of operations: • Issued 33,000 shares of common stock.Stock has par value of $1.00 per share and was issued at $24.00 per share.
• Earned net income of $73,000.
• Paid no dividends.
At the end of 2018,what is the total amount of paid-in capital?

A) $33,000
B) $865,000
C) $792,000
D) $73,000

Question 56

Stock issued at amounts in excess of par value results in a gain that is reported on the income statement.

Question 57

When a corporation issues no-par stock,it debits the asset received and credits the stock account.

Question 58

When a corporation sells 9,000 shares of $12 par value common stock for $159,000,Common Stock is credited for $108,000.

Question 59

The following information is from the December 31,2018 balance sheet of Millner Corporation. $$\begin{array} { | l | r | } \hline \text { Preferred Stock, } \$ 100 \text { par } & \$ 560,000 \\\hline \text { Paid-In Capital in Excess of Par-Preferred } & 43,000 \\\hline \text { Common Stock, } \$ 1 \text { par } & 190,000 \\\hline \text { Paid-In Capital in Excess of Par-Common } & 510,000 \\\hline \text { Retained Earnings } & \underline { 191,500 } \\\hline \text { Total Stockholders' Equity } & \$ 1,494,500 \\\hline\end{array}$$ What was the average issue price of the common stock shares? (Round your answer to the nearest cent.)

A) $1.88
B) $1.00
C) $2.68
D) $3.68

Question 60

A company cannot report a gain or loss when buying or selling its own stock.

Question 61

April,Inc.issued 4000 shares of preferred stock for $240,000.The stock has a par value of $60 per share.The journal entry to record this transaction would ________.

A) credit Cash $240,000, debit Preferred Stock-$60 Par Value $4000, and debit Paid-In Capital in Excess of Par-Preferred $236,000
B) debit Cash $240,000, credit Preferred Stock-$60 Par Value $4000, and credit Paid-In Capital in Excess of Par-Preferred $236,000
C) credit Cash $240,000 and debit Preferred Stock-$60 Par Value $240,000
D) debit Cash $240,000 and credit Preferred Stock-$60 Par Value $240,000

Question 62

All City Realty,Inc.issued 7000 shares of $9 stated value common stock for $16 per share.The journal entry to record this transaction includes a credit to ________.

A) Common Stock for $112,000
B) Paid-In Capital in Excess of Stated - Common for $63,000
C) Common Stock - $9 Stated Value for $49,000
D) Paid-In Capital in Excess of Stated - Common for $49,000

Question 63

August,Inc.had the following transactions in 2018,its first year of operations: • Issued 22,000 shares of common stock.The stock has a par value of $3.00 per share and was issued at $16.00 per share.
• Issued 1800 shares of $160 par value preferred stock at par.
• Earned net income of $37,000.
• Paid no dividends.
At the end of 2018,what is total stockholders' equity?

A) $677,000
B) $354,000
C) $286,000
D) $640,000

Question 64

When stock is issued for assets other than cash,the transaction is always recorded at the market value of the stock issued.

Question 65

When 1000 shares of $3 stated value common stock is issued at $18 per share,________.

A) Common Stock - $3 Stated is credited for $18,000
B) the account titled Paid-In Capital in Excess of Stated-Common is used to record the issue price of the stock
C) the difference between the issue price and the stated value is credited to Paid-In Capital in Excess of Stated-Common
D) the accounting is exactly the same as the accounting for par value stock

Question 66

A corporation issues 16,000 shares of its $3 stated value common shares.The issue price is $9 per share.The credit to the Common Stock account is $144,000.

Question 67

Accounting for stated value common stock is identical to accounting for par value stock.

Question 68

The following information is from the December 31,2018 balance sheet of May Corporation. $$\begin{array} { | l | r | } \hline \text { Preferred Stock, } \$ 100 \text { par } & \$ 390,000 \\\hline \text { Paid-In Capital in Excess of Par-Preferred } & 25,000 \\\hline \text { Common Stock, } \$ 1 \text { par } & 152,000 \\\hline \text { Paid-In Capital in Excess of Par-Common } & 346,000 \\\hline \text { Retained Earnings } & \$ 3,900 \\\hline \text { Total Stockholders' Equity } & \$ 996,900 \\\hline\end{array}$$ What was the total paid-in capital as of December 31,2018?

A) $736,000
B) $996,900
C) $913,000
D) $888,000

Question 69

Preferred Stock is included in the stockholders' equity section of the balance sheet and is often listed after Common Stock.

Question 70

The following information is from the December 31,2018 balance sheet of January Corporation. $$\begin{array} { | l | r | } \hline \text { Preferred Stock, } \$ 100 \text { par } & \$ 270,000 \\\hline \text { Paid-In Capital in Excess of Par-Preferred } & 22,000 \\\hline \text { Common Stock, } \$ 1 \text { par } & 69,000 \\\hline \text { Paid-In Capital in Excess of Par-Common } & 206,000 \\\hline \text { Retained Earnings } & \underline { 56,600 } \\\hline \text { Total Stockholders' Equity } & \$ 623,600 \\\hline\end{array}$$ What is the average issue price of the preferred stock shares? (Round answers to the nearest dollar.)

A) $108
B) $100
C) $167
D) $106

Question 71

Which of the following statements,regarding no-par stock,is incorrect?

A) Regardless of the stock's issue price, Cash is debited and Common Stock is credited for the cash received.
B) There can be no Paid-In Capital in Excess of Par.
C) There is no par to be in excess of.
D) All of the statements are correct.

Question 72

Pumpkin Corporation issued 10,000 shares of common stock on January 1,2018.The stock has no par value and was issued at $17 per share.The journal entry for this transaction includes a ________.

A) debit to Cash for $170,000 and a credit to Common Stock-No-Par Value for $170,000
B) debit to Cash for $170,000 and a credit to Paid-In Capital in Excess of Par-Common for $170,000
C) credit to Cash for $170,000 and a debit to Common Stock-No-Par Value for $170,000
D) credit to Cash for $170,000, a debit to Paid-In Capital in Excess of Par-Common for $10,000, and a debit to Common Stock-No-Par Value for $160,000

Question 73

O'Malley,Inc.issued 60,000 shares of common stock in exchange for manufacturing equipment.The equipment has a fair value of $1,420,000.The stock has a par value of $0.05 per share.The journal entry to record this transaction includes a ________.

A) debit to Cash for $14,170,000
B) credit to Gain on Sale of Common Stock for $1,480,000
C) credit to Paid-In Capital in Excess of Par-Common for $1,417,000
D) credit to Common Stock-$0.05 Par Value for $1,420,000

Question 74

Manley Corporation issued 2,500 shares of its $50 par,4% preferred stock on March 31,2019,at $80 per share.The amount credited to Paid-In Capital in Excess of Par - Preferred is $200,000.

Question 75

Preferred Stock is included in the long-term assets section of the balance sheet.

Question 76

On December 2,2018,St.Andrews,Inc.purchases land.In exchange for the land,St.Andrews,Inc.issues 8,000 shares of common stock with $1.00 par value.The land has been appraised at a market value of $400,000.Prepare the journal entry for this transaction.Omit explanation.

Question 77

When a stockholder contributes land to a corporation in exchange for stock,________.

A) liabilities and stockholders' equity are increased
B) assets and stockholders' equity are increased
C) one asset is increased and another asset is decreased
D) assets and liabilities are increased

Question 78

If preferred stock is issued for an amount above the par value,the amount of the par value times the number of shares issued is credited to Paid-In Capital in Excess of Par-Preferred.

Question 79

When stock is issued for assets other than cash,the transaction is recorded at the market value of the stock issued or the market value of the assets received,whichever is more clearly determinable.

Question 80

On December 2,2018,Eshares,Inc.purchases land.In payment for the land,Eshares,Inc.issues 6000 shares of common stock with $6 par value.The land has been appraised at a market value of $430,000.Which of the following is included in the journal entry to record this transaction?

A) debit Common Stock-$6 Par Value for $36,000 and debit Paid-In Capital in Excess of Par -Common $394,000
B) credit Common Stock-$6 Par Value for $36,000 and credit Paid-In Capital in Excess of Par-Common $394,000
C) credit Common Stock-$6 Par Value for $430,000
D) debit Cash $430,000