Question 1

The par value of a stock is the minimum amount of capital of the corporation existing for the protection of creditors.

Accepted Answer

True

Question 2

A corporation is a legal entity separate from its owners; it may sue and be sued, but it may not own property in its own name.

Accepted Answer

A corporation can own property in its own name.

Question 3

Only preferred stock of a corporation must have a par value.

Accepted Answer

Preferred stock may or may not have a par value, it depends on the issuing corporation's decision. However, common stock (if any) of a corporation is the type of stock that must have a par value.

Question 4

The purchase of treasury stock creates an asset for the corporation and is recorded at the cost of the shares purchased, not par value.

Accepted Answer

The purchase of treasury stock reduces stockholders' equity, not assets, and is recorded at the cost of the shares purchased, not par value.

Question 5

When a corporation fails to pay a dividend one year on its common stock, it is said to be "in arrears."

Accepted Answer

Dividends in arrears refer to missed dividend payments on preferred stock, not common stock. Preferred dividends must be paid before common dividends, and if missed, they accumulate as "in arrears" until paid. Common stock dividends do not accumulate if missed.

Question 6

The number of shares a corporation may issue is specified in the articles of incorporation and approved by the Securities and Exchange Commission.

Accepted Answer

The answer of The number of shares a corporation may...

Question 7

When a state authorizes the sale of stock to stockholders, the corporation will credit Retained Earnings for the par value of the stock.

Accepted Answer

When a state authorizes the sale of stock to stockholders, the corporation will credit Common Stock for the par value of the stock, not Retained Earnings. Retained Earnings is a component of stockholders' equity that represents the accumulated earnings of the company that have not been distributed as dividends.

Question 8

Contributed capital is equivalent to paid-in capital.

Accepted Answer

Contributed capital and paid-in capital both refer to the amount of capital that has been invested by shareholders in a company. They are interchangeable terms.

Question 9

It is illegal for the government to double tax corporate earnings.

Accepted Answer

The answer of It is illegal for the government to...

Question 10

Common stock is considered the legal capital of the corporation.

Accepted Answer

Legal capital refers to the minimum amount of capital that must be maintained in a corporation, typically represented by the par value of issued shares, not the common stock itself.

Question 11

A stockholders' subsidiary ledger will have entries made for each stockholder showing the number of shares held.

Accepted Answer

This statement is true. A stockholders' subsidiary ledger is used to track individual stockholders and the number of shares they hold. Therefore, entries are made for each stockholder showing the number of shares held.

Question 12

Treasury stock is stock of a corporation that has been issued and then reacquired and then cancelled.

Accepted Answer

Treasury stock is stock that has been issued and then reacquired by the corporation, but it is not cancelled and can be reissued in the future.

Question 13

A stock split will normally increase the market price of the stock and decrease the number of shares on the market.

Accepted Answer

A stock split will increase the number of shares on the market and decrease the market price of the stock, while maintaining the total market capitalization.

Question 14

Stockholders of a corporation are personally liable for the debts of the corporation if all shares of stock are owned by the officers of the corporation.

Accepted Answer

Stockholders are not personally liable for the debts of the corporation, even if all shares of stock are owned by the officers. Limited liability is one of the advantages of operating a business as a corporation.

Question 15

A corporation continues in existence even if a stockholder dies or withdraws from the organization.

Accepted Answer

A corporation is a separate legal entity and its existence is not dependent on the presence or absence of its stockholders.

Question 16

Cumulative preferred stock means the stock is entitled to its regular dividend plus an additional share of the total amount of declared dividends.

Accepted Answer

Cumulative preferred stock means that if any dividends are missed, they must be paid out to cumulative preferred stockholders before common shareholders can receive any dividends. It does not entitle the holder to an additional share of the total amount of declared dividends.

Question 17

A stock split will decrease the total par value of the stock.

Accepted Answer

A stock split increases the number of shares while maintaining the same total par value, as the par value per share is adjusted accordingly.

Question 18

Treasury stock is stock that is issued and outstanding but not authorized.

Accepted Answer

Treasury stock is actually stock that has been authorized, issued, and then repurchased by the corporation. It is not considered outstanding because it is not available for trading on the open market.

Question 19

When a stockholder sends in a proxy statement to a corporation he or she owns stock in, they relinquish their voting rights to the officers of the corporation.

Accepted Answer

A proxy statement allows a stockholder to authorize someone else to vote on their behalf, but it does not automatically relinquish voting rights to the officers of the corporation.

Question 20

International accounting standards require mandatory redeemable preferred stock to be classified as a liability on the balance sheet and not as equity.

Accepted Answer

International accounting standards (IAS 32) require that mandatory redeemable preferred stock is classified as a liability on the balance sheet if it meets certain conditions, such as having an obligation to redeem the shares and/or mandatorily paying dividends. This is because such shares have characteristics more similar to debt than equity.

Quiz 11: Stockholders Equity: Paid-In Capital