Question 1

On January 2,Year 1,Torres Corporation issued 20,000 shares of $10 par-value common stock for $11 per share.Which of the following statements is true?

Accepted Answer

The cash account will increase by $220,000 (20,000 × $11), the common stock account will increase by $200,000 (20,000 × $10 par value), and the paid-in capital in excess of par value account will increase by $20,000 (20,000 × $1).

Question 2

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

Accepted Answer

As part of the regulatory function, states approve the maximum number of shares of stock that corporations are legally permitted to issue. This maximum number is called authorized stock.

Question 3

Which of the following statements is the most common explanation as to why a company might have a negative amount of total stockholders' equity on its balance sheet?

Accepted Answer

When a company has negative shareholders' equity, it is usually because of a negative balance in Retained Earnings.

Question 4

Blair Scott started a sole proprietorship by depositing $75,000 cash in a business checking account.During the accounting period,the business borrowed $30,000 from a bank,earned $18,000 of net income,and Scott withdrew $12,000 cash from the business.Based on this information,what is the balance in Scott's capital account at the end of the accounting period?

Accepted Answer

Ending capital = Beginning capital + Contributions ? Withdrawals + Net income
Ending capital = $0 + $75,000 ? $12,000 + $18,000 = $81,000

Question 5

On January 12,Year 1,Gilliam Corporation issued 550 shares of $12 par-value common stock for $15 per share.The number of shares authorized is 5,000,and the number of shares outstanding prior to this transaction was 1,200.Which of the following describes the effect of the January 12 transaction on the elements of the financial statements?

Accepted Answer

Assets (cash) increase by $8,250 (or 550 shares × $15 per share), common stock increases by $6,600 (or 550 shares × Par value of $12 per share), and paid-in excess increases by $1,650 (or $8,250 ? $6,600). The cash inflow of $8,250 is reported in the financing activities section of the statement of cash flows.

Question 6

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

Accepted Answer

Unlike corporate stockholders, the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies. The benefit of limited liability is one of the most significant reasons limited liability companies and corporations are so popular.

Question 7

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

Accepted Answer

Any amount received above the par or stated value is recorded in an account called Paid-in Capital in Excess of Par (or Stated) Value. Only a corporation issues stock; thus, only corporations have this type of account.

Question 8

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

Accepted Answer

Preferred stockholders do not have voting rights.

Question 9

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

Accepted Answer

A corporation is a separate legal entity created by the authority of a state government.

Question 10

Ogilvie Corp.issued 12,000 shares of no-par stock for $40 per share.Ogilvie was authorized to issue 35,000 shares.What effect will this event have on the elements of the company's financial statements?

Accepted Answer

Assets (cash) and stockholders' equity (common stock) increase by $480,000 (or 12,000 shares × $40 per share). The cash inflow is reported in the financing activities section of the statement of cash flows.

Question 11

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

Accepted Answer

Few laws specifically affect the operations of proprietorships and partnerships. Corporations, however, are heavily regulated.

Question 12

What is meant by the term "double taxation?"

Accepted Answer

Corporations pay income taxes on their earnings and then owners pay income taxes on distributions (dividends) received from corporations. As a result, distributed corporate profits are taxed twice-first when income is reported on the corporation's income tax return and a second time when distributions are reported on individual owners' tax returns. This phenomenon is commonly called double taxation and is a significant disadvantage of the corporate form of business organization.

Question 13

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

Accepted Answer

Corporations are more able to raise capital because they can issue common stock to a large number of potential investors. In contrast, the capital resources of proprietorships and partnerships are limited to a relatively small number of private owners. Although proprietorships and partnerships can also obtain resources by borrowing, the amount creditors are willing to lend them is usually limited by the size of the owners' net worth. Of the three business forms, only corporations are separate legal entities that continue to exist regardless of changes in ownership. Only corporations are subject to double taxation. And, only corporations issue capital stock.

Question 14

On February 2,Year 1,Farmer Corporation issued 9,000 shares of no-par stock for $17 per share.Within two hours of the issue,the stock's price jumped on the New York Stock Exchange to $21 per share.Which of the following answers describes the effect of the February 2 transaction on the elements of the financial statements?

Accepted Answer

Assets (cash) and stockholders' equity (common stock) increase by $153,000 (or 9,000 shares × $17 per share). The cash inflow of $153,000 is reported in the financing activities section of the statement of cash flows. The price an investor must pay to purchase a share of stock is the market value. Published financial statements report historical information, in this case, the company's paid-in capital is recorded at the issue price of $17 per share. In other words, the increase in market price following the issuance does not affect the elements of the company's financial statements.

Question 15

Which of the following entities would report income tax expense on its income statement?

Accepted Answer

Because proprietorships and partnerships are not separate taxable entities, company earnings are taxable to the owners rather than the company itself. On the other hand, corporations pay income taxes on their earnings.

Question 16

Which of the following best describes how each share of par value stock issued is reported in the Common Stock account?

Accepted Answer

The par value of the stock is recorded in the Common Stock account. Any amount received above the par value is recorded in the Paid-in Capital in Excess of Par (or Stated) Value account.

Question 17

Which of the following statements about par value is true?

Accepted Answer

Par value is an arbitrary value assigned to stock by the board of directors; like stated value, par value designates legal capital. On the other hand, market value is the price at which securities sell in the secondary market. Thus, par value has little connection to market value.

Question 18

Which of the following statements best describes the term "par value?"

Accepted Answer

Par value is an arbitrary value assigned to stock by the board of directors; like stated value, par value designates legal capital.

Question 19

Fixit Corporation issued 20,000 shares of $20 par value common stock at its current market price of $32.How does this event affect total stockholders' equity?

Accepted Answer

The event increases assets and stockholders' equity by $640,000 (or $32 per share × 20,000 shares). The increase in stockholders' equity is divided into two parts, $400,000 of par value (or $20 per share × 20,000 shares) and $240,000 ($640,000 ? $400,000) received in excess of par value.

Question 20

Fred and Barney started a partnership.During Year 1,Fred invested $20,000 in the business and Barney invested $32,000.The partnership agreement called for each partner to receive an annual distribution equal to 15% of his capital contribution.Any further earnings were to be retained in the business and divided equally between the partners.The partnership reported net income of $38,000 during Year 1.How will the $38,000 of net income be split between Fred and Barney respectively? (Hint: Consider both the cash withdrawals and allocation of remaining income.)
Fred Barney

Accepted Answer

The answer of Fred and Barney started a partnership.During Year...

Quiz 11: Proprietorships, partnerships, and Corporations