Deck 8: Proprietorships, Partnerships, and Corporations

Question 1

Which of the following is a disadvantage of a sole proprietorship?

A) Entrenched management.
B) Unlimited liability of the owner.
C) Double taxation.
D) Excessive regulation.

Answer 1

B

Question 2

Which form of business organization is established as a separate legal entity from its owners?

A) Sole proprietorship
B) Corporation
C) Partnership
D) None of these

Answer 2

B

Question 3

Flynn Company issued 2,000 shares of $10 par value common stock at a market price of $16. As a result of this accounting event, total paid-in capital would

A) increase by $12,000.
B) be unaffected by the event.
C) increase by $32,000.
D) increase by $20,000.

Answer 3

C

Question 4

Which of the following is not considered an advantage of the corporate form of business organization?

A) Ability to raise large amounts of capital.
B) Government regulation.
C) Ease of transferability of ownership.
D) Continuity of existence.

Question 5

Which of the following is not normally a preference given to the holders of preferred stock?

A) The right to vote before the common stockholders at the corporation's annual meeting.
B) The right to receive a specified amount of dividends prior to any being paid to common stockholders.
C) The right to receive preference over common stockholders as to the distribution of assets during a liquidation process.
D) All of these are normal preferences for preferred stockholders.

Question 6

Tyrone Gonzales started a sole proprietorship by depositing $30,000 cash in a business checking account. During the accounting period the business earned $16,000 of net income and Gonzales withdrew $10,000 cash from the business. Based on this information, at the end of the accounting period, Gonzales' capital account contained a balance of:

A) $28,000.
B) $30,000.
C) $34,000.
D) $36,000.

Question 7

Which of the following entities would have a "Paid-in Capital in Excess" account in the equity section of the balance sheet?

A) A sole proprietorship
B) A corporation
C) A partnership
D) All of these

Question 8

The difference between the corporate form of business organization and other forms is most clearly shown in which of the following sections of the financial statements?

A) equity section of the balance sheet
B) expenses section of the income statement
C) assets section of the balance sheet
D) operating activities section of the statement of cash flows

Question 9

The term "Retained Earnings" is best explained by which of the following statements?

A) Money set aside for the redemption of bonds payable.
B) A measure of equity generated by a corporation through its operating activities.
C) Cash retained in a separate bank account designated for emergency uses.
D) The difference between total revenue and total expenses in an accounting period.

Question 10

The term "double taxation" refers to which of the following:

A) Sole proprietorships must pay income taxes on their net incomes and the owners are also required to pay income taxes on their withdrawals.
B) In a partnership, both partners are required to claim their share of net income on their tax returns.
C) Corporations must pay income taxes on their net income and their stockholders pay income tax on the dividends they receive.
D) Limited Liability Companies are forced to pay income taxes to both the state and the federal governments.

Question 11

Laverne and Shirley started a partnership. Laverne invested $4,000 in the business and Shirley invested $6,000. The partnership agreement stipulated that profits would be divided as follows. Each partner would receive a 10% return on their invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $4,500 during an accounting period, the amount of income assigned to the two partners would be:

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 12

The par value of common stock

A) changes in proportion to market value.
B) is not directly related to market value.
C) is greater than market value.
D) is less than market value.

Question 13

On February 2, 2014, Barker's Pool Supply Corporation issued 900 shares of no-par stock for $7 per share. Within two hours of the issue, the stock's price jumped on the UMSL stock exchange to $11 per share. Which of the following answers describes the effect of the February 2, 2014 transaction?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 14

Which of the following terms designates the maximum number of shares that a corporation may issue?

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

Question 15

On January 2, 2014, the Hoover Corporation issued 25,000 shares of $10 stated-value common stock for $24 per share. Which of the following statements is true?

A) The Paid-in Capital in Excess of Stated Value account will increase by $350,000.
B) The Cash account will increase by $500,000.
C) The Stock Payable account will increase by $600,000.
D) The Common Stock account will increase by $600,000.

Question 16

Flynn Corp., which is authorized to issue 25,000 shares of no-par common stock, issued 10,000 shares for $150,000. What effect will this event have on the accounting equation?

A) Increase assets by $375,000 increase, equity by $375,000.
B) Increase assets by $150,000, increase net income by $150,000.
C) Increase assets by $150,000, increase equity by $150,000.
D) Increase assets by $150,000, increase net income by $150,000 and increase assets by $150,000, increase equity by $150,000.

Question 17

Which of the following terms designates the number of shares of a corporation's stock currently held by stockholders?

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

Question 18

Which of the following statements historically described the term "par value?"

A) The maximum liability of the investor.
B) The amount that must be paid to purchase a share of stock.
C) Determined by dividing total stockholder's equity by the number of shares of stock.
D) The number of shares currently in the hands of stockholders.

Question 19

Which of the following statements about types of business entities is true?

A) Ownership in a partnership is represented by having shares of capital stock.
B) For accounting purposes, a sole proprietorship is not a separate entity from its owner.
C) One advantage of corporations is limited liability for stockholders.
D) Sole proprietorships are subject to double taxation.

Question 20

On January 12, 2014, the Picard Corporation issued 750 shares of $12 par-value common stock for $15 per share. Which of the following answers describes the effect of the January 12, 2014 transaction?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 21

On March 1, 2014 Garrison, Incorporated declared the annual cash dividend on its 1,500 outstanding shares of $5 par value, 5% noncumulative preferred stock. The dividend will be paid on May 1, 2014, to the stockholders of record as of April 1, 2014.
What effect will payment of the dividend on May 1 have on Garrison's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 22

Purchase of treasury stock would be shown on the statement of cash flows as

A) an operating activity.
B) an investing activity.
C) a financing activity.
D) none of these.

Question 23

Reissuance of treasury stock for cash is what kind of transaction?

A) asset source
B) asset use
C) asset exchange
D) claims exchange

Question 24

When the Common Stock account is disclosed on the balance sheet, it is reported at the ________ of the common stock.

A) current market value
B) most recent issue price
C) lower of cost or market
D) par or stated value

Question 25

Which of the following statements about the Treasury Stock account is correct?

A) Treasury Stock is a liability.
B) The balance in the Treasury Stock account reduces total Stockholders' Equity.
C) Treasury Stock is an asset.
D) The balance in Treasury Stock reduces Retained Earnings.

Question 26

Griggs Company reissued 100 shares of its treasury stock. Griggs had purchased the stock for $25 per share and reissued it for $35 per share. Select the answer that accurately reflects how the reissue of the treasury stock would affect Griggs' financial statements.

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 27

Which answer would represent the financial statement presentation of stockholders equity after the following transactions?
Issued 200 shares of $12 par value common stock for $25 a share. Five hundred shares are authorized. Purchased 75 shares of treasury stock at $22 a share.

A)

B)
Common Stock, $\$ 12$ par value, 500 shares authorized,
$\begin{array}{ll}200 \text { shares issued and outstanding } & \$ 2,400 \\\text { Paid in Capital in Excess of Par - Common } & \$ 2,600 \\\text { Less: Treasury Stock, 75 shares a \$12 par value } & (\$ 900)\end{array}$
C)
$$\begin{array}{l}\text { Common Stock, } \$ 12 \text { par value, } 500 \text { shares authorized, }\\\begin{array} { l c } 200 \text { shares issued, } 425 \text { outstanding } & \$ 5,100 \\\text { Paid in Capital in Excess of Par - Common } & \$ 5,525 \\\text { Less: Treasury Stock, } 75 \text { shares } a \$ 22 \text { per share } & (\$ 1,650)\end{array}\end{array}$$
D)
Common Stock, $\$ 25$ market value, 500 shares authorized,
$\begin{array}{lc}200 \text { shares issued, } 125 \text { outstanding } & \$ 5,000 \\\text { Less: Treasury Stock, } 75 \text { shares } a \$ 22 \text { per share } & (\$ 1,650)\end{array}$

Question 28

Which of the following represents the normal sequence of items presented in the Stockholders' Equity section of a corporation's balance sheet?

A) Stock accounts, Paid-in Capital in Excess accounts, Retained Earnings, Treasury Stock
B) Stock accounts, Paid-in Capital in Excess accounts, Treasury Stock, Retained Earnings
C) Stock accounts, Treasury Stock, Paid-in Capital in Excess accounts, Retained Earnings
D) Retained Earnings, Stock accounts, Paid-in Capital in Excess accounts, Treasury Stock

Question 29

Mitchell Company was authorized to issue 50,000 shares of common stock. The company issued 27,000 shares of stock and later purchased 5,000 shares of treasury stock. The number of outstanding shares of common stock is:

A) 45,000.
B) 28,000.
C) 22,000.
D) 17,000.

Question 30

Gruening Company declared and paid a cash dividend. Which of the following choices accurately reflects how this event would affect the company's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 31

On March 1, 2014 Garrison, Incorporated declared the annual cash dividend on its 1,500 outstanding shares of $5 par value, 5% noncumulative preferred stock. The dividend will be paid on May 1, 2014, to the stockholders of record as of April 1, 2014.
What effect will the declaration of the dividend have on Garrison's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 32

Madison Co. paid dividends of $3,000; $6,000; and $10,000 during 2012, 2013 and 2014 respectively. The company had 500 shares of preferred stock outstanding with a $10 per share cumulative dividend. The amount of dividends received by the common shareholders during 2014 would be:

A) $6,000.
B) $5,000.
C) $3,000.
D) $4,000.

Question 33

The declaration of a cash dividend will

A) decrease assets and equity.
B) increase liabilities and decrease equity.
C) decrease liabilities and increase equity.
D) increase assets and liabilities.

Question 34

Which of the following is a negative or contra stockholders' equity account?

A) Treasury stock
B) Contributed capital in excess of par
C) Retained earnings
D) Appropriated retained earnings

Question 35

Griffin, Inc. purchased 200 shares of its own $20 par value stock for $30 cash per share. Which of the following answers reflects how this purchase of treasury stock would affect Griffin's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 36

When a company purchases treasury stock:

A) total equity decreases.
B) cash flow from investing activities decreases.
C) total assets are unaffected.
D) total assets increase.

Question 37

At the end of the accounting period, Isaac Company had a balance of $4,000 in its common stock account, additional paid in capital of $4,000, retained earnings of $3,000, and $1,000 of treasury stock. The total amount of stockholders' equity is:

A) $10,000.
B) $13,000.
C) $12,000.
D) $8,000.

Question 38

Which of the following statements is a reason why a company would buy treasury stock?

A) because management believes the market price of stock is undervalued
B) to have stock available to issue to employees in stock option plans
C) to avoid a hostile takeover
D) all of these are reasons a company would buy treasury stock

Question 39

Purchase of treasury stock for cash is what kind of transaction?

A) asset source
B) asset use
C) asset exchange
D) claims exchange

Question 40

Summer Corporation registers an issuance of Common Stock class B with agreed upon par value of $5. Another term sometimes used in place of "par" is _______________.

A) current market value
B) most recent issue price
C) lower of cost or market
D) par or stated value

Question 41

In 2014, Wagner Associates appropriated $65,000 of retained earnings to satisfy the restrictive covenant of a loan agreement. What are the financial statement effects of the appropriation?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 42

On June 10, 2014 Thetford Builders, Inc., a publicly traded company, announced that it had been awarded a contract to build a football stadium at a contract price of $500 million. This contract would increase its projected revenues by 25% over the next three years. Which of the following statements is correct in regards to this announcement?

A) The market price of Thetford's stock will probably be higher on June 11, 2014 than on June 10.
B) Thetford's net cash flow from operations will increase by 25% over the next three years.
C) Thetford's total assets should be increased by $500 million on June 10, 2014 to recognize this contract.
D) Thetford's net income will increase by 25% over the next three years.

Question 43

STU Corporation is authorized to issue 500,000 shares of $12.00 par value common stock. As of December 2014, STU's stockholders' equity accounts report the following balances: At the end of 2014, ABD decided to issue a 15% stock dividend, when the market price of the stock was $14 per share.
Calculate the number of shares outstanding after the stock dividends are issued.

A) 7,950 shares
B) 53,000 shares
C) 60,950 shares
D) 79,500 shares

Question 44

Which describes the stockholders' equity account created when a corporation purchases its own stock and holds it for reissue?

A) Treasury stock
B) Contributed capital in excess of par
C) Retained earnings
D) Appropriated retained earnings

Question 45

Bridge Corporation issued a 15% stock dividend on 20,000 outstanding shares of $10 stated value common stock. The distribution was made at the time the market value of the stock was $50 a share. How did this transaction affect the company's total stockholders' equity?

A) The total balances in equity accounts increased by $150,000.
B) The sum of the balances in equity accounts increased by $30,000.
C) The sum of the balances in equity accounts decreased by $150,000.
D) Total stockholders' equity was not affected by this transaction.

Question 46

Which of the following is a reason why a corporation may choose not to pay cash dividends?

A) The board and management prefer to reinvest all net income for future growth.
B) The corporation does not have adequate Cash.
C) The corporation does not have adequate Retained Earnings.
D) All of these are valid reasons not to pay dividends.

Question 47

The issuance of a stock dividend will

A) not affect total equity.
B) increase retained earnings.
C) decrease total paid-in capital.
D) decrease net income.

Question 48

On July 1, 2014, Gustafson Company appropriated retained earnings in the amount of $18,000 for a future remodeling project. On June 30, 2014, the balance of Retained Earnings was $41,400 and the Cash balance was $21,600. Which of the following answers shows the effect of the appropriation of retained earnings on the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 49

What kind of transaction is the declaration of a stock dividend?

A) asset source transaction
B) claims exchange transaction
C) asset use transaction
D) asset exchange transaction

Question 50

If a corporation decides to reissue, for cash, preferred treasury stock this is which type of transaction type?

A) asset source
B) asset use
C) asset exchange
D) claims exchange

Question 51

What effect will the declaration and distribution of a stock dividend have on net income and cash flows?

A) no effect on net income or cash flows
B) no effect on net income, decrease cash flows
C) decrease net income, decrease cash flows
D) increase net income, no effect on cash flows

Question 52

Which of the following would not be a reason for the market price of Bishop Corporation stock to decrease?

A) Bishop's net income for the current year was lower than last year.
B) The general condition and future outlook of the economy are shaky.
C) There has been a recent decrease in key interest rates.
D) Investors expect Bishop's financial performance to decline in the future.

Question 53

On September 11, 2014, the Hafar Corporation has unrestricted Retained Earnings of $6,000,000, Appropriated Retained Earnings of $4,000,000, Cash of $7,500,000, and Accounts Payable of $500,000. What is the maximum amount that the corporation could use for cash dividends on that date?

A) $7,500,000
B) $7,000,000
C) $6,000,000
D) $5,500,000

Question 54

At the time that Stellar Company issued a 2-for-1 stock split, the company had 1,000 shares of $5 par value common stock outstanding. Stockholders' equity also included $14,000 of additional paid in capital in excess of par value and $20,000 of retained earnings. Immediately after the stock split,

A) the balance in the common stock account would be $10,000.
B) the amount of paid-in capital would be $20,000.
C) the balance in the retained earning account would be $15,000.
D) the balance in the common stock account would be $5,000.

Question 55

Thad Rives is planning to invest in one of the following companies based on their average performance over the past five years, which is presented below. If Thad is looking for a growth company (with earnings that are growing rapidly and probably will continue to grow rapidly), which one should he choose?

A) Big Bat, Inc.
B) Bug-lite, Inc.
C) "Mood-blue, Inc".
D) Jones, Inc.

Question 56

A reason often given for a stock split is:

A) to protect the interest of creditors.
B) to reduce the market price of the stock.
C) to increase the par value of the stock.
D) to absorb the treasury stock.

Question 57

Grant Corporation declared a 2-for-1 stock split when it had 12,000 shares of $5 par value common stock outstanding. If the market price of the stock had been $20 a share before the split, the par value, number of shares and approximate market value after the split would be: $\begin{array}{llll}&\text { Par Value No.}&\text { of Shares }&\text {Market Value }\\\text { A) } & \$ 2.50 & 24,000 & \$ 10.00 \\\text { B) } & \$ 2.50 & 24,000 & \$ 5.00 \\\text { C) } & \$ 2.50 & 12,000 & \$ 10.00 \\\text { D) } & \$ 5.00 & 24,000 & \$ 20.00\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 58

STU Corporation is authorized to issue 500,000 shares of $12.00 par value common stock. As of December 2014, STU's stockholders' equity accounts report the following balances: At the end of 2014, ABD decided to issue a 15% stock dividend, when the market price of the stock was $14 per share.
Determine the dollar amount to be transferred from Retained Earnings to paid-in capital accounts as a result of the stock dividend.

A) $95,400
B) $111,300
C) $900,000
D) $1,050,000

Question 59

Bridge Corporation decides to issue a 15% stock dividend on 20,000 outstanding shares of $10 stated value common stock. The distribution is made at the time the market value of the stock is $50 a share. How will this transaction affect the company's equity accounts?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 60

A corporation's board of directors declares a dividend to common shareholders. This dividend consists of a specified amount of additional shares of common. This is what type of transaction?

A) asset source transaction
B) claims exchange transaction
C) asset use transaction
D) asset exchange transaction

Question 61

A corporation is a legal entity created by the authority of a state government, separate and distinct from its owners.

Question 62

The book value of a share of stock is generally approximately equal to the market or selling price of the stock.

Question 63

All corporations are subject to extensive government regulation.

Question 64

A small, closely-held corporation can avoid double taxation by electing S Corporation status.

Question 65

A 10% preferred stock dividend is declared. The declaration and subsequent issuance do/does

A) not affect total equity.
B) increase retained earnings.
C) decrease total paid-in capital.
D) decrease net income.

Question 66

A distribution by a sole proprietorship to the owner is called a dividend.

Question 67

Stock of a closely-held corporation does not trade on a stock exchange.

Question 68

Proprietorships are not separate legal entities; their earnings are taxable to the owners and not to the business itself.

Question 69

A separate capital account is maintained for each partner in a partnership.

Question 70

One consequence of the Sarbanes-Oxley Act is that some of the largest corporations in the United States are taking their companies' stock off the stock exchanges.

Question 71

Double taxation is a significant disadvantage of the partnership form of business organization.

Question 72

The Securities and Exchange Commission was established in response to the accounting scandals that occurred in 2001 and 2002.

Question 73

The executives that manage a corporation on a daily business are hired by the company's stockholders.

Question 74

Articles of incorporation, prepared by a business that wishes to incorporate, normally include the corporation's name and purpose, its location, and provisions for capital stock.

Question 75

Corporations are more heavily regulated by governments than are sole proprietorships and partnerships.

Question 76

The stock market crash in 1929 led to the beginning of extensive regulation of corporations.

Question 77

A partner is responsible for (liable for) his/her own actions and also for actions taken by another partner on behalf of the partnership.

Question 78

Ease of transferability of ownership is one of the important advantages of the corporate form of business organization.

Question 79

The balance sheet of a sole proprietorship will report two equity accounts: one for amounts contributed by the owner and one for the business's earnings.

Question 80

Establishing a sole proprietorship generally requires the owner to get a charter from the state government.