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

Question 1

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 1

False

Question 2

Double taxation is a disadvantage of a corporation because the same party has to pay taxes twice on the income.

Answer 2

False

Question 3

The initial owners of stock of a newly formed corporation are called directors.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

A corporation is a separate entity for accounting purposes but for legal purposes.

Question 15

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

Question 16

The balance in Retained Earnings at the end of the period is created by closing entries.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

Cash dividends are normally paid on shares of treasury stock.

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

Paid-in capital may originate from real estate donated to the corporation.

Question 34

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

Question 35

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

Question 36

The declaration and issuance of a stock dividend does affect the total amount of a corporation's assets, liabilities, or stockholders' equity.

Question 37

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

Question 38

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

Question 39

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 40

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

Question 41

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

Question 42

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 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

A corporation has 12,000 shares of $20 par value 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 48

A corporation has 10,000 shares of $100 par value 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 49

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 50

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

Question 51

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 52

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

Question 53

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

Question 54

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

Question 55

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 56

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 in the income statement.

Question 57

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 58

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

Question 59

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

Question 60

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

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 corporation shares must get the approval of other stockholders.

Question 62

A corporation issues 2,500 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) $25,000
B) $45,000
C) $20,000
D) $ 5,000

Question 63

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 64

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

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

Question 65

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 66

One of the main disadvantages of the corporate form is the

A) professional management
B) double taxation of dividends
C) charter
D) corporation must issue stock

Question 67

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 68

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 69

The par value per share of common stock represents

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

Question 70

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 71

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 72

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 73

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

Question 74

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 75

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 76

The ability of a corporation to obtain capital is

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

Question 77

The excess of issue price over par of common stock is termed a(n)

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

Question 78

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 79

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 80

Which of the following is not 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.