Deck 12: Organization and Operation of Corporations

Question 1

A limited liability company is a corporation for professionals such as lawyers and accountants.

Answer 1

False

Question 2

A privately held corporation has a limited life because it is tied to the physical lives of its owners.

Answer 2

False

Question 3

The main differences between profit reported by a proprietorship and a corporation are income tax expense and salaries paid to owners.

Answer 3

True

Question 4

The equity section for the single proprietorship can be called owner's equity because the equity belongs to the owner. The equity section for a corporation can be calledshareholders' equity because the equity belongs to a group of owners known as shareholders.

Question 5

A corporation is a legal entity separate from its owners.

Question 6

A corporation can issue two general types of shares: common and preferred.

Question 7

An underwriter keeps shareholder records and prepares official lists of shareholders and dividend payments.

Question 8

The statement of changes in equity for a corporation shows both how retained earnings and share capital have changed during the accounting period.

Question 9

The equity section of a corporation's balance sheet is called Corporation Equity.

Question 10

The two main areas of the equity section of a corporation's balance sheet are share capital and retained earnings.

Question 11

Organization costs may be paid for by giving shares to promoters of a corporation in exchange for their services in organizing the corporation.

Question 12

Reporting procedures are the same for private and public corporations.

Question 13

Profits or losses are recorded in a share capital account.

Question 14

The income of a corporation is taxed twice, first as corporate income and then as personal income to shareholders who receive cash dividends.

Question 15

When a corporation sells shares directly, it pays a brokerage house to issue the shares.

Question 16

The equity of a corporation changes because of profits or losses, distributions of incomes dividends) and shareholder investments.

Question 17

Whether a business is organized as a corporation or as a proprietorship, the profit reported on the income statement will be the same.

Question 18

Shares are attractive to investors because shareholders are not liable for the corporation's actions and debts and because shares are easily transferred.

Question 19

Corporations can be either public or limited.

Question 20

Authorized shares are the total number of shares outstanding.

Question 21

Special rights for preferred shares may include a preference in receiving dividends and in the distribution of assets if the corporation is liquidated.

Question 22

Corporations issue preferred shares in order to raise capital without sacrificing control of the corporation and to increase the return earned by common shareholders.

Question 23

Cumulative preferred shares carry the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders.

Question 24

If a corporation is authorized to issue 1,000 preferred shares, which have a current market value of $80 per share, it has $80,000 worth of shares outstanding.

Question 25

The declaration of cash dividends reduces retained earnings.

Question 26

The liability for preferred dividends declared is recorded on the date of record.

Question 27

Dividends represent the distribution of profits to the managers of a corporation.

Question 28

The date of record is the date the directors vote to pay a dividend to shareholders.

Question 29

The use of preferred shares to increase return to common shareholders is an example of financial leverage.

Question 30

If shares are issued for non-cash assets, the assets are always recorded at the current market value of the shares.

Question 31

Shares are most commonly issued for cash.

Question 32

When preferred shares are issued, this will always cause an increase in the future return to common shareholders.

Question 33

Preferred shares are seen by some investors as being less risky and having a greater dividend rate than common shares.

Question 34

The shareholders can vote to pay themselves a dividend.

Question 35

Common shares usually carry a preference for dividends.

Question 36

Dividends represent the distribution of profits to the shareholders of a corporation.

Question 37

When issuing shares, the initial investment is credited to Retained Earnings.

Question 38

When issuing common shares, the initial investment is credited to Common Shares.

Question 39

One of the preference rights for preferred shares is the right to vote.

Question 40

Whenever the dividend rate on preferred shares is higher than the rate the corporation earns on its assets, the effect of issuing preferred shares is to increase the dividend rate earned by common shareholders.

Question 41

Dallas Sports Ltd has 100 shares of $15, noncumulative, preferred shares outstanding, and $160,000 of common shares outstanding. In the company's first year of operation, no dividends were paid, but during the second year Dallas Sports paid dividends of$24,000. The dividend should be distributed as follows:

A) $1,500 preferred; $22,500 common.
B) $1,400 preferred; $12,600 common.
C) $12,000 preferred; $12,000 common.
D) $7,000 preferred; $7,000 common.
E) $3,000 preferred; $21,000 common.

Question 42

Common shares:

A) Make shareholders liable for acts of the corporation because they share in ownership.
B) Are usually redeemable.
C) Always represent total contributed capital.
D) Allow shareholders to bind the corporation to contracts because they share in ownership.
E) Represent residual equity in a corporation.

Question 43

If a corporation that has only one class of shares, or if there is more than one class, the class that has no preference over the other classes of shares, is called:

A) Common shares.
B) Cumulative preferred shares.
C) Convertible preferred shares.
D) Preferred shares.
E) Participating preferred shares.

Question 44

Callable preferred shares give the shareholders the option of exchanging their preferred shares into common shares at a specified rate.

Question 45

A new corporation ended its first year of operations with assets of $100,000, liabilities of $75,000, and contributed capital common shares) of $10,000. What was thecorporation's profit for the year?

A) $25,000.
B) $75,000.
C) $65,000.
D) $90,000.
E) $15,000.

Question 46

The accounting equation for a corporation is:

A) Assets - Liabilities = Equity.
B) Assets = Liabilities + Equity.
C) Assets = Equity + Liabilities.
D) All of these answers are correct.
E) None of these answers is correct.

Question 47

Zach Sports Ltd has 1,000 shares of $5.50, cumulative preferred shares and 10,000common shares issued and outstanding. In the previous year which was the first year of operations), the company paid total dividends of $1,000. The amount that must be paid to the preferred shareholders in the current year before any dividend is paid to common shareholders is:

A) $4,500.
B) $12,000.
C) $10,000.
D) $3,500.
E) $1,000.

Question 48

A proxy is:

A) The right of common shareholders to protect their proportionate interests in a corporation by having the first opportunity to purchase additional shares of common shares issued by the corporation.
B) An arbitrary value a corporation places on each of the corporation's shares.
C) An amount of assets defined by law that shareholders must invest and leave invested in a corporation.
D) A contractual commitment by an investor to purchase unissued shares and become a shareholder.
E) A legal document that gives an agent of a shareholder the power to exercise the voting rights of that shareholder's shares.

Question 49

When a corporation issues only one class of shares they are:

A) Special shares.
B) Private shares.
C) Common shares.
D) Public shares.
E) Preferred shares.

Question 50

Barb Inc issued 500 common shares in payment of a $1,900 bill from its accountant for assistance in filing its charter. The entry to record this transaction will include:

A) A $1,900 credit to Common Shares.
B) A $1,900 debit to Common Shares.
C) A $1,900 credit to Organization Costs.
D) A $1,900 debit to Legal Expense.
E) A $1,900 debit to Accounting Expense.

Question 51

Lucie Corporation was formed on January 1 of the current year. The corporate charter authorized the company to issue 100,000 common shares. During the first month ofoperation, the corporation issued 300 shares to its lawyer in payment of a $5,600 bill for preparing the articles of incorporation. The entry to record this transaction wouldinclude:

A) A credit to Common Shares for $3,300.
B) A debit to Organization Costs for $3,000.
C) A debit to Organization Costs for $5,600.
D) A credit to Organization Costs for $5,600.
E) A debit to Common Shares for $5,600.

Question 52

Pam Corporation sold 10,000 common shares at $25 per share cash. The entry to record this transaction would include:

A) A credit to Common Shares for $25,000.
B) A credit to Cash for $250,000.
C) A debit to Common Shares for $250,000.
D) A debit to Contributed Capital for $250,000.
E) A credit to Common Shares for $250,000.

Question 53

Unpaid preferred dividends are called dividends in arrears.

Question 54

Bruce Corporation issued 8,000 common shares in exchange for land that has a fair market value of $184,000. The entry to record this transaction would include:

A) A debit to Land for $8,000.
B) A debit to Common Shares for $8,000.
C) A debit to Common Shares for $184,000.
D) A credit to Land for $184,000.
E) A credit to Common Shares for $184,000.

Question 55

The total amount of cash and other assets received by a corporation from its shareholders in exchange for common shares is included in:

A) Retained earnings.
B) Contributed capital.
C) Equity.
D) Private held shares.
E) Organization costs.

Question 56

All of the following are given as possible motivations for a corporation to issue preferred shares except:

A) Raise capital without sacrificing voting control.
B) If the preferred shares are convertible, they are more attractive to potential investors.
C) Increase the return of common shareholders.
D) Appeal to investors who do not want to invest in common shares.
E) Preferred dividends are paid before common dividends.

Question 57

Quality Cleaning Corp. issued 50 no-par-value common shares for land with a market value of $4,000. Dillon had originally issued common shares at $100 two years ago, but there is currently no market value available for their shares. The amount of contributed capital arising from this transaction is:

A) $4,000.
B) $600.
C) $1,000.
D) $100.
E) $6,000.

Question 58

Buying shares in a corporation is attractive to investors because:

A) Shares are easily transferred.
B) Shareholders are not liable for the corporation's actions and debts.
C) Shareholders are not agents of the corporation.
D) A corporation has unlimited life.
E) All of these answers are correct.

Question 59

Tech Inc's board of directors voted to declare a common cash dividend of $.0.75 per share. The company has 15,000 common shares authorized, with 10,000 issued and outstanding. The amount of the dividend is:

A) $3,750.
B) $375.
C) $7,125.
D) $7,500.
E) $5,625.

Question 60

Dillon Snowboards Ltd issued 60 no-par-value common shares for $10,000. The amount of contributed capital arising from this transaction is:

A) $6,000.
B) $10,000.
C) $100.
D) $1,000.
E) $600.

Question 61

The payment of a dividend will reduce the following two accounts:

A) Common shares and cash.
B) Equity and cash.
C) Cash and dividends payable.
D) Retained earnings and dividends payable.
E) Equity and retained earnings.

Question 62

The date a board of directors votes to pay a dividend is called the:

A) Date of the annual shareholders meeting.
B) Date of declaration.
C) Date of record.
D) Liquidating date.
E) Date of payment.

Question 63

Owners of preferred shares often do not have:

A) Ownership rights to assets of the corporation.
B) Rights in liquidation.
C) The right to sell their shares.
D) Voting rights.
E) Preference to dividends.

Question 64

The achievement of an increased return on common shares by paying dividends on preferred shares or interest at a rate that is less than the rate of return earned with theassets invested in the corporation by the preferred shareholders or creditors is called:

A) Capital gain.
B) Financial leverage.
C) Contributed capital.
D) No par value.
E) Preemptive right.

Question 65

Preferred shares that give the shareholders the option of exchanging their preferred shares for common shares at a specified rate are known as:

A) Callable preferred shares.
B) Convertible preferred shares.
C) Cumulative preferred shares.
D) Participating preferred shares.
E) Noncumulative preferred shares.

Question 66

Preferred shares that the issuing corporation, at its option, may retire by paying aspecified amount to the preferred shareholders plus any dividends in arrears are called:

A) Private shares.
B) Callable preferred shares.
C) Participating preferred shares.
D) Convertible preferred shares.
E) Cumulative preferred shares.

Question 67

The total amount of shares that a corporation's charter allows it to issue is:

A) Authorized.
B) Common.
C) Outstanding.
D) Issued.
E) Preferred.

Question 68

The financial statement that shows the changes to a corporation's contributed capital is called:

A) Statement of Contributed Capital.
B) Balance Sheet.
C) Statement of Changes in Equity.
D) Income Statement.
E) None of these answers is correct.

Question 69

A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared is a:

A) Convertible preferred share.
B) Cumulative preferred share.
C) Noncumulative preferred share.
D) Participating preferred share.
E) Callable preferred share.

Question 70

Which of the following occurs at the date of record?

A) The company pays the dividend.
B) The company accrues the dividend to be paid.
C) A list of shareholders entitled to receive the dividend is prepared.
D) The board of directors declares the dividend.
E) None of the choices occurs at the date of record.

Question 71

The category of equity for a corporation which represents the cumulative profits less losses and dividends is called:

A) The income statement.
B) Preferred shares.
C) Retained earnings.
D) Financial leverage.
E) Contributed capital.

Question 72

The costs of bringing a corporation into existence, including legal fees, promoters' fees, and amounts paid to the government are called:

A) Minimum legal capital.
B) Organization costs.
C) Financial leverage.
D) Prepaid expenses.
E) Contributed capital.

Question 73

The preemptive right is the right of preferred shareholders to:

A) Actively participate in the company decision making process.
B) Receive dividends before the common shareholders receive.
C) Share proportionately in any new sale of shares.
D) Share in the profits and losses of the company.
E) None of the choices are correct.

Question 74

The right of common shareholders to protect their proportionate interest in acorporation by having the first opportunity to buy additional shares of common shares issued by the corporation is called:

A) Preemptive right.
B) Voting right.
C) Right to call.
D) Financial leverage.
E) Proxy.

Question 75

Legal costs incurred to get a corporation up and running should be accounted for by debiting:

A) Organization costs.
B) Retained earnings.
C) Cash.
D) Share capital.
E) Common shares.

Question 76

The type of share that can be bought back by the company at a specified time and price is:

A) Cumulative preferred share.
B) Convertible preferred share.
C) Participating preferred share.
D) Callable common share.
E) Redeemable preferred share.

Question 77

Brian's Stereo Ltd issued preferred shares that have a $10 dividend. This means that:

A) The amount of the dividend is $10 per year per share.
B) The market price is $100 per share.
C) Preferred shareholders have a guaranteed dividend.
D) Preferred shareholders are entitled to 10% of the annual profit.
E) The market price is $10 per share.

Question 78

A dividend preference for preferred shares means that:

A) Preferred shareholders are allocated their dividends before any dividends are allocated to common shareholders.
B) Dividends are paid quarterly.
C) Preferred shareholders are guaranteed dividends.
D) Only preferred shareholders will receive dividends.
E) All of these answers are correct.

Question 79

The largest number of shares specified by a corporation are known as:

A) Issued.
B) Convertible.
C) Outstanding.
D) Non-convertible.
E) Authorized.

Question 80

For preferred shares to increase the return earned by common shareholders, the preferred dividend rate as a percentage of the capital raised must be:

A) Lower than the rate of return on common and preferred equity combined.
B) Both equal to and lower than the rate of return on common and preferred equity combined.
C) Equal to the rate of return on common and preferred equity combined.
D) Higher than the rate of return on common and preferred equity combined.
E) None of these answers is correct.