Deck 20: Corporations: Formation and Capital Stock Transactions

Question 1

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

Answer 1

True

Question 2

When common stock is issued, the par value, or stated value, of the shares issued is recorded in the Common Stock account.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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 6

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

Question 7

Before dividends can be paid, they must be declared and voted upon by the shareholders.

Question 8

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

Question 9

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

Question 10

Stock that carries special privileges or rights is called ____________________ stock.

Question 11

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

Question 12

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

Question 13

Stockholders are the ____________________ of a corporation.

Question 14

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 15

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

Question 16

In respect to corporate debt, stockholders have ____________________ liability.

Question 17

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

Question 18

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

Question 19

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 20

The amount received in excess of the par value of preferred stock issued is recorded in an account called Paid-in Capital in Excess of Par Value-Preferred Stock.

Question 21

Subchapter S corporations

A) have the disadvantage of double taxation.
B) require that shareholders report their share of profits on their partnership tax returns.
C) have the advantage that shareholders can take part in policy and operating decisions.
D) are entities formed as corporations but are treated essentially as a partnership so the corporation pays no income tax.

Question 22

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 23

Ari Hightower owns 200 shares of preferred stock that is convertible into common stock at the rate of 3 shares for every share surrendered. If she surrenders all her preferred stock, she will have _____________________ shares of common stock.

Question 24

A corporation is owned by

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

Question 25

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 26

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 27

Profits in the form of ____________________ are paid to the stockholders of a corporation.

Question 28

If a corporation sells 400 shares of 12 percent, $100 par-value preferred stock for $105 a share, the entry to record the transaction will include a credit of ____________________ to the Preferred Stock account.

Question 29

The stockholders of a corporation

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

Question 30

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

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

Question 31

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

Question 32

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 33

Common stockholders will receive a dividend

A) in every year that the corporation is profitable.
B) in every year that the board of directors declares a dividend.
C) every year, whether the corporation is profitable or not.
D) every year that profits exceed a stated amount.

Question 34

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

Question 35

Which of the following statements is correct?

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

One disadvantage of a corporation is

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

Question 41

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

Question 42

Organization costs should be

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

Question 43

The entry to record the issuance of 500 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $7,000 and a credit to Common Stock for

A) $5,000 and a credit to Treasury Stock for $2,000.
B) $5,000 and a credit to Paid-in Capital in Excess of Par Value-Common Stock for $2,000.
C) $5,000 and a credit to Gain on Sale of Common Stock for $2,000.
D) $7,000.

Question 44

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

Question 45

A corporation has 10,000 shares of 6 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 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 46

A corporation has 4,000 shares of 5 percent, $100 par-value preferred stock and 50,000 shares of $2 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $100,000, the common stockholders will receive a dividend of

A) $1.00 a share.
B) $1.60 a share.
C) $2.00 a share.
D) $2.40 a share.

Question 47

The entry to record the issuance of 1000 shares of $2 stated-value common stock for $10 a share consists of a debit to Cash for $10,000 and a credit to Common Stock for

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

Question 48

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 49

A corporation has 1,000 shares of 10 percent, $50 par-value preferred stock and 10,000 shares of $5 par-value common stock outstanding. If the board of the directors decides to distribute dividends totaling $40,000, the common stockholders will receive a dividend of

A) $5.00 a share.
B) $4.00 a share.
C) $3.50 a share.
D) $3.75 a share.

Question 50

The entry to record the issuance of 1,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $14,000 and a credit to Common Stock for

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

Question 51

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 52

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 880 shares of the preferred stock. During the current year she decides to convert 220 shares into common stock. How many shares of common stock will she receive?

Question 53

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 54

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 55

The Preferred Stock account is shown in the

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

Question 56

Participating preferred stockholders

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

Question 57

The entry to record the issuance of 2,000 shares of $10 par-value common stock for $14 a share consists of a debit to Cash for $28,000 and a credit to Common Stock for

A) $28,000.
B) $20,000 and a credit to Gain on Sale of Common Stock for $8,000.
C) $20,000 and a credit to Treasury Stock for $8,000.
D) $20,000 and a credit to Paid-in Capital in Excess of Par Value-Common Stock for $8,000.

Question 58

The transfer of stock between shareholders is

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

Question 59

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 decides to distribute 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 60

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 61

The Northwest Corporation has outstanding 20,000 shares of 12 percent, $50 par-value, noncumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $60,000 as dividends in 2013, $140,000 in 2014, and $200,000 in 2012.
Compute the following:
1. Amount paid on each share of preferred stock in 2013.
2. Amount paid on each share of common stock in 2013.
3. Amount paid on each share of preferred stock in 2014.
4. Amount paid on each share of common stock in 2014.
5. Amount paid on each share of preferred stock in 2012.
6. Amount paid on each share of common stock in 2012.

Question 62

The Odegard Corporation has outstanding 50,000 shares of 6 percent, $100 par-value, noncumulative, nonparticipating preferred stock and 100,000 shares of $2 par-value common stock, sold at an average price of $20 per share. The board of directors voted to distribute $200,000 as dividends in 2013, $400,000 in 2014, and $450,000 in 2012.
Compute the following:
1. Total dividend paid to preferred stockholders in 2013.
2. Total dividend paid to common stockholders in 2013.
3. Total dividend paid to preferred stockholders in 2014.
4. Total dividend paid to common stockholders in 2014.
5. Total dividend paid to preferred stockholders in 2012.
6. Total dividend paid to common stockholders in 2012.

Question 63

The Mayfair Corporation was organized on August 1, 2013. The firm is authorized to issue 80,000 shares of no-par-value common stock with a stated value of $20 per share and 20,000 shares of $50 par-value, 12 percent preferred stock. Record the selected transactions on page 1 of a general journal. Omit descriptions.

Question 64

Contreras Corporation issued 10,000 shares of its no-par-value common stock (stated value, $3) for cash at $30 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.

Question 65

McDougall Corporation issued 40,000 shares of its $2 par-value common stock for cash at $20 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.

Question 66

Rukshad Patel, the owner of a sole proprietorship, is planning to incorporate her business. Her capital account has a balance of $200,000 after revaluation of the assets. Her cash account totals $60,000. She will receive 10 percent, $10 par-value preferred stock with a total par value equal to the cash transferred. The balance of her capital is to be exchanged for shares of $2 par-value common stock with a total par value equal to the remaining capital. How many shares of preferred stock should be issued to Patel? How many shares of common stock should be issued to Patel?

Question 67

The Gibbs Corporation has outstanding 20,000 shares of 10 percent, $50 par-value, cumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $80,000 as dividends in 2013, $110,000 in 2014, and $130,000 in 2012.
Compute the following:
1. Total dividend paid to preferred stockholders in 2013.
2. Total dividend paid to common stockholders in 2013.
3. Total dividend paid to preferred stockholders in 2014.
4. Total dividend paid to common stockholders in 2014.
5. Total dividend paid to preferred stockholders in 2012.
6. Total dividend paid to common stockholders in 2012.

Question 68

The Southeast Corporation has outstanding 40,000 shares of 12 percent, $50 par-value, noncumulative, nonparticipating preferred stock and 160,000 shares of $10 par-value common stock. The board of directors voted to distribute $240,000 as dividends in 2013, $280,000 in 2014, and $520,000 in 2012.
Compute the following:
1. Amount paid on each share of preferred stock in 2013.
2. Amount paid on each share of common stock in 2013.
3. Amount paid on each share of preferred stock in 2014.
4. Amount paid on each share of common stock in 2014.
5. Amount paid on each share of preferred stock in 2012.
6. Amount paid on each share of common stock in 2012.

Question 69

Turque Corporation issued 4,000 shares of its no-par-value common stock (stated value, $20) for cash at $22 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.

Question 70

Corning Corporation issued 1,000 shares of its $5 par-value common stock for cash at $13 a share. Record the issuance of the stock on page 1 of a general journal. Omit the description.

Question 71

Elsinore Corporation has outstanding 200,000 shares of $100 par-value preferred stock, issued at an average price of $110 a share. The preferred stock is convertible into common stock at the rate of five shares of common stock for each share of preferred stock. Louis Reynault owns 500 shares of the preferred stock. During the current year he decides to convert 225 shares into common stock. How many shares of common stock will he receive?

Question 72

Venti Corporation has outstanding 100,000 shares of $50 par-value preferred stock, issued at an average price of $74 a share. The preferred stock is convertible into common stock at the rate of two shares of common stock for each share of preferred stock. Martin Spellman owns 100 shares of the preferred stock. During the current year he decides to convert 50 shares into common stock. How many shares of common stock will she receive?

Question 73

Cary Company, a newly organized corporation, received a bill from its lawyers for $7,500 for time spent in organizing the company.
1. How should these costs be treated for federal income tax purposes?
2. How should they be treated in the company's financial statements?

Question 74

Robert Schuler, the owner of a sole proprietorship, is planning to incorporate his business. His capital account has a balance of $100,000 after revaluation of the assets. His cash account totals $30,000. He will receive 10 percent, $10 par-value preferred stock with a total par value equal to the cash transferred. The balance of his capital is to be exchanged for shares of $20 par-value common stock with a total par value equal to the remaining capital. How many shares of preferred stock should be issued to Schuler? How many shares of common stock should be issued to Schuler?

Question 75

The Ventura Corporation, a new corporation, took over the assets and liabilities of the Jeremy Ruggers Company on January 2, 2013. The assets and liabilities assumed, after appropriate revaluation by Ruggers Company, are shown below. The Ventura Corporation is authorized to issue 100,000 shares of $10 par-value common stock and 50,000 shares of 12 percent, $50 par-value preferred stock. Record the following transactions on page 1 of a general journal. Omit descriptions. Prepare the opening balance sheet for the corporation on January 2, 2013.

Question 76

The Lompoc Corporation is authorized to issue 500,000 shares of $4 par-value common stock and 100,000 shares of 6 percent, $100 par-value preferred stock. Record the following transactions on page 1 of a general journal. Omit descriptions.

Question 77

The Haines Corporation has outstanding 50,000 shares of 6 percent, $100 par-value, cumulative, nonparticipating preferred stock and 100,000 shares of $2 par-value common stock, sold at an average price of $20 per share. The board of directors voted to distribute $200,000 as dividends in 2013, $400,000 in 2014, and $450,000 in 2012.
Compute the following:
1. Total dividend paid to preferred stockholders in 2013.
2. Total dividend paid to common stockholders in 2013.
3. Total dividend paid to preferred stockholders in 2014.
4. Total dividend paid to common stockholders in 2014.
5. Total dividend paid to preferred stockholders in 2012.
6. Total dividend paid to common stockholders in 2012.

Question 78

On July 1, 2013, Abbott Corporation received a subscription from Brad Jones for 1,200 shares of its $1 par-value common stock at a price of $20 a share. Jones made a payment of $10 per share on the stock at the time of the subscription. Record the receipt of the subscription and the cash payment on page 1 of a general journal. Then, using the same page of the general journal, record the payment of the balance of Jones' subscription and issuance of the stock on August 1, 2013. Omit the descriptions.

Question 79

Chicagoland Landscape Company, a newly organized corporation, received a bill from its lawyers for $10,000 for time spent in organizing the company.
1. How should these costs be treated in the company's accounting records? Why?
2. How should they be treated for federal income tax purposes?

Question 80

The Maynard Corporation has outstanding 10,000 shares of 10 percent, $50 par-value, cumulative, nonparticipating preferred stock and 80,000 shares of $10 par-value common stock. The board of directors voted to distribute $40,000 as dividends in 2013, $55,000 in 2014, and $65,000 in 2012.
Compute the following:
1. Total dividend paid to preferred stockholders in 2013.
2. Total dividend paid to common stockholders in 2013.
3. Total dividend paid to preferred stockholders in 2014.
4. Total dividend paid to common stockholders in 2014.
5. Total dividend paid to preferred stockholders in 2012.
6. Total dividend paid to common stockholders in 2012.