Deck 8: Proprietorships, Partnerships, and Corporations

Question 1

On February 2, Year 1, the Farmer Corporation issued 9,000 shares of no-par stock for $17 per share. The next day, 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, Year 1 transaction?

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

Answer 1

A
Explanation: Assets (cash) and common stock increase by $153,000 (9,000 × $17). The cash inflow is a financing activity. The increase in market price following the issuance does not affect the company's financial statements.

Question 2

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

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

Answer 2

C
Explanation: Sole proprietors do not have the liability shield that corporations do.

Question 3

The par value of a company's stock:

A) dictates the initial price of the stock.
B) may be revised each time a company issues more shares of stock.
C) is generally greater than market value.
D) has little connection to the market value of the stock.

Answer 3

D
Explanation: Par value is an arbitrary number, but is typically lower than market value.

Question 4

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

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

Question 5

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 company's financial statements?

A) Increase assets by $1,400,000, increase equity by $1,400,000.
B) Increase assets by $480,000, increase equity by $480,000.
C) Increase cash flow from investing activities by $480,000.
D) None of these answer choices are correct.

Question 6

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

A) The number of shares currently in the hands of stockholders.
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) An amount used in determining a corporation's legal capital.

Question 7

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

A) Number of shares issued
B) Number of shares authorized
C) Par value
D) Number of shares outstanding

Question 8

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

A) Ability to raise capital.
B) Continuity of existence.
C) Ease of transferability of ownership.
D) Lack of government regulation.

Question 9

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

A) Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on their dividends.
B) In a partnership, both partners are required to claim their share of net income on their tax returns.
C) A sole proprietorship must pay income taxes on its net income and the owner is also required to pay income taxes on withdrawals.
D) A sole proprietorship must pay income taxes to both the state government and the federal government.

Question 10

When the common stock account is disclosed on the balance sheet, it is reported at:

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

Question 11

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 is 1,200. Which of the following answers describes the effect of the January 12, Year 1 transaction?

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

Question 12

Ix Company issued 20,000 shares of $20 par value common stock at a market price of $32. As a result of this accounting event, the amount of stockholders' equity would:

A) increase by $640,000.
B) be unaffected.
C) increase by $240,000.
D) increase by $400,000.

Question 13

Which of the following entities would have a paid-in capital in excess of par (or stated) value account in the equity section of the balance sheet?

A) A corporation.
B) A municipality.
C) A sole proprietorship.
D) A partnership.

Question 14

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

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

Question 15

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

A) A sole proprietorship.
B) A corporation.
C) A partnership.
D) All of these answer choices are correct.

Question 16

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, at the end of the accounting period Scott's capital account contained a balance of:

A) $93,000.
B) $111,000.
C) $72,000.
D) $81,000.

Question 17

Fred and Barney started a partnership. Fred invested $20,000 in the business and Barney invested $32,000. The partnership agreement stipulated that profits would be divided as follows: Each partner would receive a 15% return on invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $38,000 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 18

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

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

Question 19

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?

A) The common stock account will increase by $220,000.
B) The cash account will increase by $200,000.
C) Total equity will increase by $200,000.
D) The paid-in capital in excess of par value account will increase by $20,000.

Question 20

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

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

Question 21

At the end of the accounting period, Houston Company had $12,000 of par value common stock issued, additional paid-in capital in excess of par value - common of $11,000, retained earnings of $12,000, and $4,000 of treasury stock. The total amount of stockholders' equity is:

A) $37,000.
B) $39,000.
C) $19,000.
D) $31,000.

Question 22

Flagler Corporation shows a total of $660,000 in its common stock account and $1,600,000 in its paid-in capital in excess of par value - common stock account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued?

A) 117,500
B) 200,000
C) 82,500
D) It cannot be determined

Question 23

On March 1, Year 1, Gilmore Incorporated declared a cash dividend on its 1,500 outstanding shares of $50 par value, 6% preferred stock. The dividend will be paid on May 1, Year 1 to the stockholders of record as of April 1, Year 1. How will the entry to record the dividend on March 1 affect the financial statements?

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

Question 24

Montana Company was authorized to issue 200,000 shares of common stock. The company had issued 50,000 shares of stock when it purchased 10,000 shares of treasury stock. The number of outstanding shares of common stock was:

A) 190,000.
B) 60,000.
C) 40,000.
D) 50,000.

Question 25

Kellogg, 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 Kellogg's financial statements?

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

Question 26

Chandler 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 27

Vailes Company reissued 200 shares of its treasury stock. The treasury stock originally cost $25 per share and was reissued for $35 per share. Which of the following accurately reflects how the reissue of the treasury stock would affect Vailes's financial statements?

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

Question 28

The issuance of a stock dividend will:

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

Question 29

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $208,054 and $231,012 respectively. Also during Year 1, the corporation declared and paid cash dividends of $29,000 and issued stock dividends valued at $16,000. Total expenses were $32,916. Based on this information, what was the amount of total revenue for Year 1?

A) $68,158
B) $143,154
C) $100,874
D) $179,132

Question 30

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

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

Question 31

Llewelyn Company purchased 1,000 shares of its own $10 par value common stock when the market price of the stock was $36 per share. How would this event affect the company's financial statements?

A) Increase the treasury stock account and increase the paid-in capital account in excess of par value − common account by $10,000.
B) Increase the treasury stock account and decrease the cash account by $36,000.
C) Increase the treasury stock account by $36,000, increase the common stock account by $10,000, and increase the paid-in capital account in excess of par value − common account by $26,000.
D) Increase the cash account by $36,000, decrease the treasury stock account by $10,000, and increase the paid-in capital account in excess of par − Common account by $26,000.

Question 32

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 33

On March 1, Year 1, Gilmore Incorporated declared a cash dividend on its 1,500 outstanding shares of $50 par value, 6% preferred stock. The dividend will be paid on May 1, Year 1 to the stockholders of record as of April 1, Year 1. Which of the following reflects the financial statement effects on the May 1, Year 1 date of payment?

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

Question 34

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

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

Question 35

Which of the following statements about the impact of treasury stock on the amounts reported on the balance sheet is correct?

A) The balance in the treasury stock account increases paid-in capital.
B) The balance in the treasury stock account reduces paid-in capital.
C) The balance in the treasury stock account reduces total stockholders' equity.
D) The balance in the treasury stock reduces retained earnings.

Question 36

Curtain Co. paid dividends of $6,000; $12,000; and $20,000 during Year 1, Year 2, and Year 3, respectively. The company had 1,000 shares of 5%, $200 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

A) $4,000.
B) $6,000.
C) $8,000.
D) $10,000.

Question 37

Where is treasury stock reported on a corporation's balance sheet?

A) As an addition to total paid-in capital
B) As a deduction from total stockholders' equity, following retained earnings
C) As a deduction from total paid-in capital
D) As a deduction from retained earnings

Question 38

Helena Corporation declared a 2-for-1 stock split on 8,000 shares of $6 par value common stock. If the market price of the stock had been $25 a share before the split, the par value, number of shares, and approximate market value after the split would be:

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

Question 39

Which answer would represent the financial statement presentation of the stockholders' equity section on the balance sheet after the following transactions? 1) Issued 200 shares of $20 par value common stock for $50 a share. Five hundred shares are authorized.
"2) Purchased 75 shares of treasury stock at $44 a share.
"

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

Question 40

The payment of a previously declared cash dividend will:

A) decrease assets and equity.
B) increase liabilities and decrease equity.
C) decrease liabilities and increase equity.
D) None of these answer choices are correct.

Question 41

Indicate whether each of the following statements about treasury stock is true or false.
_____ a) One reason for a corporation to buy its own stock is to boost its net income when treasury stock is reissued for a higher price.
_____ b) Corporations may buy back their own stock (treasury stock) to avoid hostile takeovers.
_____ c) Purchasing treasury stock reduces the number of issued shares.
_____ d) The treasury stock account is classified as a negative equity account.

Question 42

Indicate whether each of the following statements about stockholders' equity is true or false.
_____ a) Preferred stockholders generally have no preference to assets when the company is liquidated.
_____ b) Preferred stockholders generally have a preference to dividends.
_____ c) Preferred stock carries voting rights that give the preferred stockholders greater power in the corporation's decision-making process than common stockholders have.
_____ d) Preferred stockholders generally receive a set or fixed amount of dividends.
_____ e) If a corporation has issued noncumulative preferred stock, common stockholders may receive greater dividends than if the corporation has issued cumulative preferred stock.

Question 43

The following items appeared on the financial statements of Monroe, Inc. on December 31, Year 1:
On September 10, Year 2, when the market value of the Monroe stock was $140, the company declared and distributed an 8% stock dividend. Indicate whether each of the following statements is true or false.
_____ a) Retained earnings would increase by $224,000 as a result of the stock dividend.
_____ b) The balance in common stock would increase by $64,000 as a result of the stock dividend.
_____ c) Total paid-in capital would be $2,224,000 after the dividend had been distributed.
_____ d) Total equity would not be affected by the dividend.
_____ e) Cash flow from financing activities would increase by $224,000 as a result of the stock dividend.

Question 44

Which of the following would not be a reason for the market price of Carlyle Corporation to increase?

A) Carlyle Corp. has had good earnings in the present period.
B) A sustained increase in key interest rates.
C) The general condition and future outlook of the economy is good.
D) Investors believe Carlyle Corp. will do well in the future.

Question 45

Indicate whether each of the following statements is true or false.
_____ a) Double taxation refers to the fact that both a partnership and its partners must pay income tax on the earnings of the partnership.
_____ b) A sole proprietorship is an accounting entity separate from its owner.
_____ c) Limited liability is a benefit to both corporations and partnerships, but not to sole proprietorships.
_____ d) Unlike a partnership, a corporation is not terminated when a major stockholder withdraws his or her investment.
_____ e) Sole proprietorships are, generally, subject to fewer governmental regulations than corporations.

Question 46

On July 1, Year 1, Village Bookstore, Inc. appropriated retained earnings in the amount of $36,000 for a future remodeling project in the basement of the bookstore. On June 30, Year 1, the balance of Retained Earnings was $82,800 and the Cash balance was $43,200. Which of the following answers shows the effect of the July 1 event on the financial statements?

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

Question 47

A reason often given for a corporate stock split is to:

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

Question 48

On June 10, Year 1, Burton 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 20% over the next three years. Which of the following statements is correct with regard to this announcement?

A) The market price of Burton's stock will probably be higher on June 11, Year 1 than on June 10^th.
B) Burton's net cash flow from operations will increase by 20% over the next three years.
C) Burton's assets should be increased by $500 million on June 10, Year 1 to recognize this contract.
D) Burton's net income will increase by 20% over the next three years.

Question 49

At the time that Kirby Company issued a 2-for-1 stock split, the company had 5,000 shares of $6 par value common stock outstanding. Stockholders' equity also contained $15,000 of additional paid-in capital and $22,000 of retained earnings. Immediately after the stock split the:

A) balance in the common stock account would amount to $30,000.
B) amount of paid-in capital in excess of par-common would be equal to $150,000.
C) balance in the retained earnings account would amount to $11,000.
D) number of outstanding shares of common stock would be 2,500.

Question 50

Seymore Corp. has the following number of shares of stock outstanding:
Seymore will distribute $80,000 to the two classes of stockholders this year. Not counting the current year, the preferred stock dividends are one year in arrears. Indicate whether each of the following statements is true or false.
_____ a) Preferred stockholders will receive $16,000 of cash dividends in the current year.
_____ b) After all required preferred dividends are paid, preferred and common stockholders will share the remaining dividend.
_____ c) Common stockholders will receive $48,000 of cash dividend in the current year.
_____ d) The amount of common dividends per share that stockholders will receive in the current year is $6.40.
_____ e) The amount of dividends in arrears is zero after the $80,000 of dividends have been paid.

Question 51

Rocco Corporation decides to issue a 7.5% 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 the entry to record this transaction affect the company's equity accounts?

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

Question 52

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

Question 53

Gilligan Corporation was established on February 15, Year 1. Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock. As of December 30, Year 1, Gilligan's stockholders' equity accounts report the following balances: On December 31, Year 1, Gilligan decides to issue a 5% stock dividend. At the time of issue, the market price of the stock was $22 per share.
What is the number of shares outstanding after the stock dividend is issued?

A) 57,750 shares
B) 55,000 shares
C) 52,250 shares
D) 525,000 shares

Question 54

Gilligan Corporation was established on February 15, Year 1. Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock. As of December 30, Year 1, Gilligan's stockholders' equity accounts report the following balances: On December 31, Year 1, Gilligan decides to issue a 5% stock dividend. At the time of issue, the market price of the stock was $22 per share.
What is the dollar value of the stock dividend issued by Gilligan Corporation?

A) $60,500
B) $16,500
C) $44,000
D) $108,500

Question 55

On September 1, Year 1, Orville Corporation has unrestricted Retained Earnings of $600,000, Appropriated Retained Earnings of $400,000, Cash of $850,000, and Accounts Payable of $50,000. What is the maximum amount that can be used for cash dividends?

A) $850,000
B) $600,000
C) $800,000
D) $450,000

Question 56

Gilligan Corporation was established on February 15, Year 1. Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock. As of December 30, Year 1, Gilligan's stockholders' equity accounts report the following balances: On December 31, Year 1, Gilligan decides to issue a 5% stock dividend. At the time of issue, the market price of the stock was $22 per share.
How will the issuance of the stock dividend affect the financial statements?

A) Increase the dividends account and decrease the cash account by $108,500.
B) Decrease the common stock account by $60,500, increase the retained earnings account by $16,500, and increase the paid-in capital in excess of par-Common
C) Decrease the retained earnings account and increase the common stock account by $16,500.
D) Decrease the retained earnings account by $60,500, increase the common stock account by $16,500, and increase the paid-in capital in excess of par-Common account by $44,000.

Question 57

Chadwick Associates retained $850,000 of net income in the business in Year 1. If $75,000 was appropriated to satisfy the restrictive covenant of a loan agreement, what are the financial statements effects of the appropriation?

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

Question 58

Indicate whether each of the following statements about stockholders' equity is true or false.
_____ a) The balance in the treasury stock account increases total stockholders' equity.
_____ b) A company may acquire treasury stock in an effort to increase the market price of its stock.
_____ c) The declaration and distribution of a stock dividend reduces retained earnings.
_____ d) A 2-for-1 stock split will probably double the monetary value of each investor's holdings on the date the split takes effect.

Question 59

In accordance with restrictive debt covenants, Maynard Company appropriated $20,000 of retained earnings. How would the appropriation affect the financial statements?

A) Decease retained earnings and increase appropriated retained earnings for $20,000.
B) Decrease appropriated retained earnings and increase retained earnings for $20,000.
C) Decrease appropriated retained earnings and decrease cash for $20,000.
D) No entry would be required.

Question 60

Which of the following describes the type of management structure that is in place when board members are reluctant to fire an incompetent chief executive officer?

A) Corporate management
B) Closely held corporation
C) Entrenched management
D) Limited liability corporation

Question 61

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

Question 62

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 63

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

Question 64

The stock market crash of 1929 and the subsequent Great Depression resulted in the beginning of extensive regulation of corporations.

Question 65

In a closely held corporation, exchanges of stock are limited to transactions between individuals.

Question 66

The class or type of stock that every corporation must have is preferred stock.

Question 67

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

Question 68

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

Question 69

A benefit of corporations is that they are free from double taxation.

Question 70

The number of shares of stock outstanding generally is greater than the number of shares of stock issued.

Question 71

Liability is a significant disadvantage of the partnership form of business organization.

Question 72

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

Question 73

Indicate whether each of the following items is true or false.
_____ a) Many successful corporations do not pay dividends to their stockholders.
_____ b) Careful study of the financial statements will give investors the ability to predict future movements in the market price of a corporation's stock.
_____ c) The chief executive officer (CEO) of a corporation is usually not also a member of the board of directors.
_____ d) Dismissing an incompetent manager can be complicated when a company is experiencing entrenched management.
_____ e) The number of shares to purchase in order to attain "significant influence" of a corporation can readily be determined from the financial statements.

Question 74

All corporations are subject to extensive government regulation.

Question 75

Indicate whether each of the following statements is true or false.
_____ a) An appropriation of retained earnings limits the amount available for dividends.
_____ b) Appropriating retained earnings is considered an asset exchange transaction.
_____ c) An appropriation is recorded as a decrease to the appropriated retained earnings account and an increase to retained earnings.
_____ d) One reason for an appropriation of retained earnings is that there may be restrictive covenants in credit agreements.
_____ e) An appropriation has no effect on the accounting equation.

Question 76

Lack of ease in transferability of ownership is one of the important disadvantages of the corporate form of business organization.

Question 77

A partner is responsible for his/her own actions, but not for actions taken by another partner on behalf of the partnership.

Question 78

The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002.

Question 79

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

Question 80

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