Deck 24: Appendix

Question 1

Many of the rules in the Corporations Act can be replaced by the company's own constitiution.

Answer 1

True

Question 2

Companies must issue ordinary shares, but may or may not decide to issue preference shares.

Answer 2

True

Question 3

Which of the following characteristics is an advantage of the company form of business?

A)The potential to raise large amounts of capital
B)Company taxation
C)Separation of ownership and management
D)Higher degree of government regulation

Answer 3

A

Question 4

Which of the following is a TRUE statement about a company?

A)The owners of a company have co- ownership of the property of the company.
B)A company has a limited life.
C)A company is not taxed on the company's business income.
D)The owners of a company have limited liability for the company's debts.

Question 5

The formation of a company is generally less complicated than the formation of a partnership.

Question 6

A company is a separate legal entity formed under the Companies Act.

Question 7

The total shares issued by a company represent 100% of its ownership.

Question 8

Shareholders of a company have unlimited liability for the company's debt.

Question 9

Different classes and types of shares carry different degrees of risk for the shareholder.

Question 10

A disadvantage of the company is the separation between the owners of the company (the shareholders)and the managers of the company, which can sometimes result in a conflict of interests.

Question 11

Which of the following statements describes the company characteristic of transferability of company ownership?

A)The liabilities of the company cannot be extended to the personal assets of the shareholder.
B)Shares can be readily bought and sold by investors on the open market.
C)Companies pay income tax on company earnings, and shareholders pay personal income tax on company dividends and gains from sale of shares.
D)Shareholders are not authorised to sign contracts or make business commitments on behalf of the company.

Question 12

Which of the following is a disadvantage of the company form of business?

A)Continuous life
B)No mutual agency
C)The potential to raise large amounts of capital
D)Separation of ownership and management

Question 13

Which of the following characteristics of a company limits a shareholder's loss to the amount of his or her investment in the shares of the company?

A)Separate legal entity
B)Separation of ownership and management
C)Transferability of ownership
D)Limited liability

Question 14

Which of the following statements describes the company characteristic termed limited liability?

A)Companies pay income tax on company earnings, and shareholders pay personal income tax on company dividends and gains from sale of shares.
B)The liabilities of the company cannot be extended to the personal assets of the shareholder.
C)Shareholders are not authorised to sign contracts or make business commitments on behalf of the company.
D)Company shares can be readily bought and sold by investors on the open market.

Question 15

Which of the following statements describes the company characteristic termed no mutual agency?

A)Shares can be readily bought and sold by investors on the open market.
B)Companies pay income tax on company earnings, and shareholders pay personal income tax on company dividends and gains from sale of shares.
C)The liabilities of the company cannot be extended to the personal assets of the shareholder.
D)Shareholders are not authorised to sign contracts or make business commitments on behalf of the company.

Question 16

Which of the following statements regarding the imputation tax system is INCORRECT?

A)Shareholders are given credit against their personal tax for the tax paid by the company.
B)It minimises double taxation.
C)It reduces the amount of tax a company must pay.
D)The imputation system is used in Australia.

Question 17

Which of the following describes the term share capital?

A)The shares that have been sold for the highest price.
B)The total amount of shares that has not been sold yet.
C)The amounts received from the shareholders.
D)The total amount of shares that has been authorised by the Corporations Act.

Question 18

Which of the following company characteristics is a disadvantage of the company form of business?

A)Government regulation
B)No mutual agency
C)Transferability of ownership
D)Limited liability

Question 19

Which of the following statements describes the company characteristic termed double taxation?

A)Companies pay income tax on company earnings, and shareholders pay personal income tax on company dividends and gains from sale of shares.
B)The liabilities of the company cannot be extended to the personal assets of the shareholder.
C)Company shares can be readily bought and sold by investors on the open market.
D)Shareholders are not authorised to sign contracts or make business commitments on behalf of the company.

Question 20

Which of the following is NOT part of the role of the board of directors?

A)electing non- executive board members
B)setting company policy
C)electing a chairperson
D)appointing the chief executive officer

Question 21

Share capital consists of:

A)amounts received from shareholders.
B)capital raised by issuing debentures.
C)amounts paid by customers.
D)earnings generated by the company.

Question 22

Share capital is equity that is generated internally by company business transactions.

Question 23

All forms and classes of shares carry voting rights.

Question 24

Which of the following describes preference shares?

A)Shares which give shareholders certain preferences and advantages over ordinary shares
B)Shares that are purchased by the company for investment purposes
C)Shares that sell for a very high price
D)Shares that are sold to employees of the company as a performance incentive

Question 25

Which of the following represents one of the basic rights of shareholders?

A)Shareholders may authorise a business contract on behalf of the company.
B)Shareholders may sell their shares back to the company if they wish.
C)Shareholders may participate in management by voting on company matters.
D)Shareholders may determine at what price the company issues shares.

Question 26

All companies must issue both ordinary and preference shares.

Question 27

Which of the following describes retained earnings?

A)Externally generated capital that is raised from banks and other creditors
B)Internally generated capital that results from employees' contributions
C)Internally generated capital that results from profitable business transactions
D)Externally generated capital that is contributed by shareholders

Question 28

Retained earnings is equity that is generated internally by company business transactions.

Question 29

Which of the following represents one of the basic rights of shareholders?

A)Shareholders may authorise a business contract on behalf of the company.
B)Shareholders may sell their shares back to the company if they wish.
C)Shareholders may receive dividends from company earnings.
D)Shareholders may determine at what price the company issues shares.

Question 30

Lerner Company had the following transactions in 2013, its first year of operations. • Issued 20 000 ordinary shares. Shares were issued at $14.00 per share.
• Issued 1 000 preference shares at $100 each.
• Earned net profit of $35 000.
At the end of 2013, what is the total amount of Share capital?

A)$415 000
B)$260 000
C)$380 000
D)$120 000

Question 31

Every company issues preference shares.

Question 32

Which of the following is an advantage of preference shares?

A)Preference shareholders are guaranteed that they will not take a loss on their investment.
B)Preference shareholders generally receive a fixed amount of dividends before ordinary shareholders do.
C)Preference shareholders have higher voting rights than ordinary shareholders.
D)Preference shareholders may sell their shares for a price higher than that of ordinary shares.

Question 33

Which of the following represents one of the basic rights of shareholders?

A)Shareholders may sell their shares back to the company if they wish.
B)Shareholders can claim a portion of the company assets in the event the company is liquidated.
C)Shareholders may determine at what price the company issues shares.
D)Shareholders may authorise a business contract on behalf of the company.

Question 34

The shares of publicly owned companies are bought and sold on stock exchanges, such as the Australian Securities Exchange.

Question 35

Lerner Company had the following transactions in 2013, its first year of operations. • Issued 20 000 ordinary shares. Shares were issued at $14.00 per share.
• Issued 1 000 preference shares at $100 each.
• Earned net profit of $35 000.
At the end of 2013, what is the total amount of Shareholders' equity?

A)$415 000
B)$380 000
C)$120 000
D)$260 000

Question 36

Which of the following types of shares are considered to be LEAST risky for investors?

A)Ordinary shares
B)Par value shares
C)Preference shares
D)No par shares

Question 37

Which of the following is an advantage of preference shares?

A)Preference shareholders are guaranteed that they will not take a loss on their investment.
B)Preference shareholders may sell their shares for a price higher than that of ordinary shares.
C)Preference shareholders have the first claim on dividend funds.
D)Preference shareholders have higher voting rights than ordinary shareholders.

Question 38

The two basic types of equity on the balance sheet are:

A)loans from banks and gifts from donors.
B)ordinary shares and debentures.
C)share capital and retained earnings.
D)ordinary shares and preference shares.

Question 39

Which of the following is an advantage of preference shares?

A)In the event of liquidation, preference shareholders have first claim on remaining company assets.
B)In the event of liquidation, preference shareholders may retain their proportionate share of voting rights.
C)In the event of liquidation, preference shareholders may sell their shares for higher amounts than ordinary shares.
D)In the event of liquidation, preference shareholders are guaranteed to get their investment back in full.

Question 40

Which of the following represents one of the basic rights of shareholders?

A)Shareholders may authorise a business contract on behalf of the company.
B)Shareholders can maintain their proportionate ownership if the company issues new shares.
C)Shareholders may sell their shares back to the company if they wish.
D)Shareholders may determine at what price the company issues shares.

Question 41

Peterson Company is issuing 4 000 ordinary shares, payable by instalments. Investors must pay $10 per share on application, $5 per share on allotment, and there will be a final call of $2 payable at a later date to be determined by directors. The journal entry to record the application will be:

A)debit Trust bank account, credit Application.
B)debit Cash, credit Ordinary share capital.
C)debit Cash, credit Allotment.
D)debit Application, credit Trust bank account..

Question 42

A company had $80 000 of Sales revenue and $75 000 of Expenses. Which of the following would be the second of three year- end closing entries?

A)Debit Income summary $75 000 and credit Expenses $75 000.
B)Debit Expenses $75 000 and credit Income summary $75 000.
C)Debit Revenues $80 000 and credit Income summary $80 000.
D)Debit Income summary $5 000 and credit Retained earnings $5 000.

Question 43

If a company's share prices go up from the original issue price, the company will record income for the amount of the gain.

Question 44

Hot Tamale Company had $120 000 of revenues and $125 000 of expenses. No dividends were paid. The second of the year- end closing entries should include which of the following line items?

A)Debit Income summary $125 000.
B)Debit Retained earnings $125 000.
C)Credit Income summary $125 000.
D)Credit Retained earnings $125 000.

Question 45

Peterson Company is issuing 4 000 ordinary shares, payable by instalments. Investors must pay $10 per share on application, $5 per share on allotment, and there will be a final call of $2 payable at a later date to be determined by directors. The journal entry to record the final call by directors will include:

A)a credit to Cash.
B)a debit to Application.
C)a debit to Trust bank account.
D)a credit to Ordinary share capital.

Question 46

When a company records the year- end closing entries, the first step is to close the Revenues to Retained earnings.

Question 47

On 2 December 2014, Ewell Company purchases a piece of land from the original owner. In payment for the land, Ewell Company issues 8 000 ordinary shares each with a market value of $30. The land has been appraised at a market value of $400 000. The journal entry to record this transaction would include which of the following items?

A)Debit Ordinary share capital $160 000
B)Credit Ordinary share capital $240 000
C)Debit Cash $400 000
D)Credit Ordinary share capital $400 000

Question 48

Dallkin Corporation issued 5 000 ordinary shares at $18 per share on 1 January 2013. The journal entry for this transaction would:

A)credit Cash $90 000 and debit Ordinary shares capital $90 000.
B)debit Cash $90 000 and credit Ordinary share capital $90 000.
C)debit Cash $90 000 and credit Retained earnings $90 000.
D)credit Cash $90 000, debit Retained earnings $90 000.

Question 49

Osbourne Company issued 50 000 shares of ordinary shares in exchange for manufacturing equipment. The equipment was valued at $1 000 000. The shares have a market value of $15 per share. Osbourne should record a gain on the sale of shares for the difference between the equipment's market value and the share's current market value.

Question 50

A company had $80 000 of Sales revenue and $75 000 of Expenses. Which of the following would be the third of three year- end closing entries? (Assume no dividends were paid.)

A)Debit Income summary $5 000 and credit Retained earnings $5 000.
B)Debit Revenues $80 000 and credit Income summary $80 000.
C)Debit Expenses $75 000 and credit Income summary $75 000.
D)Debit Income summary $75 000 and credit Expenses $75 000.

Question 51

A company had $80 000 of Sales revenue and $75 000 of Expenses. Which of the following would be the first of three year- end closing entries?

A)Debit Expenses $75 000 and credit Income summary $75 000.
B)Debit Income summary $5 000 and credit Retained earnings $5 000.
C)Debit Revenues $80 000 and credit Income summary $80 000.
D)Debit Retained earnings $5 000 and credit Income summary $5 000.

Question 52

Retained earnings as shown on the balance sheet can, under certain circumstances, show a negative balance.

Question 53

Peterson Company is issuing 4 000 ordinary shares, payable by instalments. Investors must pay $10 per share on application, $5 per share on allotment, and there will be a final call of $2 payable at a later date to be determined by directors. The journal entry to record the allotment will include:

A)a debit to Cash.
B)a debit to Ordinary share capital.
C)a credit to Application.
D)a debit to Trust bank account.

Question 54

No gains or losses are ever recorded by a company when they sell or issue their own shares.

Question 55

Which of the following occurs when a shareholder invests cash in a company in exchange for shares?

A)Both assets and liabilities are increased.
B)Both assets and shareholders' equity are increased.
C)One asset is increased and another asset is decreased.
D)Both liabilities and shareholders' equity are increased.

Question 56

Which of the following describes the correct sequence of year- end closing entries?

A)Close Revenues to Income summary; close Income summary to Retained earnings; close Expenses to Retained earnings.
B)Close Revenues to Retained earnings; close Expenses to Retained earnings; close Income summary to Retained earnings.
C)Close Expenses to Income summary; close Revenues to Income summary; close Income summary to Retained earnings.
D)Close Revenues to Income summary; close Expenses to Income summary; close Income summary to Retained earnings.

Question 57

A loss for the year increases the balance in Retained earnings.

Question 58

When a company records the year- end closing entries, the Income summary balance, before it is closed to Retained earnings, should be equal to the Profit or Loss for the year.

Question 59

Hot Tamale Company had $120 000 of revenues and $125 000 of expenses. No dividends were paid. The first of the year- end closing entries should include which of the following line items?

A)Debit Retained earnings $120 000.
B)Debit Income summary $120 000.
C)Credit Retained earnings $120 000.
D)Credit Income summary $120 000.

Question 60

Osbourne Company issued 50 000 shares of ordinary shares in exchange for manufacturing equipment. The equipment was valued at $1 000 000. The shares have a value of $18 per share. The entry to record this transaction would include which of the following line items?

A)Credit Ordinary share capital $1 000 000
B)Credit Gain on sale of ordinary shares $100 000
C)Debit Cash $100 000
D)Credit Ordinary share capital $900 000

Question 61

If preference shares are non- cumulative, then the company does NOT need to pay dividends that were passed in previous years.

Question 62

Hot Tamale Company had $120 000 of revenues and $113 000 of expenses. No dividends were paid. These factors will result in which of the following?

A)Share capital will go up.
B)Retained earnings will go down.
C)Share capital will go down.
D)Retained earnings will go up.

Question 63

Most preference shares are non- cumulative.

Question 64

Which of the following is TRUE of dividends?

A)Dividends decrease share capital.
B)Dividends increase shareholders' equity.
C)Dividends are a distribution of cash or other assets to the shareholders.
D)Dividends increase assets and decrease total shareholders' equity of a company.

Question 65

Retained earnings represents:

A)the accumulated profits of the company less dividends paid out.
B)a liability on the company balance sheet.
C)the assets of the company less the liabilities.
D)capital contributed by the shareholders of a company.

Question 66

Which of the following describes a retained earnings deficit?

A)When the company does not pay out any dividends
B)When the retained earnings is a negative amount
C)When the retained earnings is less than the total share capital
D)When the company records a loss for the year

Question 67

Hot Tamale Company had $120 000 of revenues and $125 000 of expenses. No dividends were paid. These factors will result in which of the following?

A)Share capital will go down.
B)Retained earnings will go up.
C)Share capital will go up.
D)Retained earnings will go down.

Question 68

Which of the following occurs when a previously declared dividend is paid?

A)Equity increases
B)Liabilities increase
C)Liabilities decrease
D)Assets increase

Question 69

A company declares a dividend of $0.75 per share on 12 500 shares of ordinary shares. Which of the following would be included in the entry to record the declaration?

A)Retained earnings would be credited for $9 375.
B)Retained earnings would be debited for $9 375.
C)Share capital would be credited for $9 375.
D)Dividends payable would be debited for $9 375.

Question 70

On which of the following dates do dividends become a liability of a company?

A)On the date of record
B)On the declaration date
C)At the end of the financial year
D)On the payment date

Question 71

Which of the following occurs when a dividend is declared?

A)Liabilities decrease
B)Liabilities increase
C)Equity increases
D)Assets increase

Question 72

Declaring and paying dividends causes a decrease in both assets and equity.

Question 73

Which of the following would be included in the entry to record the payment of a previously declared dividend of $0.25 per share on 12 500 ordinary shares?

A)Dividends payable would be debited for $3 125.
B)Retained earnings would be debited for $3 125.
C)Cash would be debited for $3 125.
D)Dividends payable would be credited for $3 125.

Question 74

If preference shares are cumulative, then the company does NOT need to pay dividends that were passed in previous years.

Question 75

The journal entry to record the declaration of a dividend includes a credit to Cash.

Question 76

On 1 November 2013, Oster Company declared a dividend of $3.00 per share. Oster Company has 20 000 ordinary shares outstanding, and no preference shares. The date of record is 15 November, and the payment date is 30 November 2013. No journal entry is made on the date of record.

Question 77

A dividend's declaration date is the date the board of directors announces the intention to pay the dividend.

Question 78

When a company has issued both preference and ordinary shares, the preference shareholders are allocated their dividends first.

Question 79

Hot Tamale Company had $120 000 of revenues and $125 000 of expenses. No dividends were paid. The third of the year- end closing entries should include which of the following line items?

A)Credit Retained earnings $5 000.
B)Credit Income summary $125 000.
C)Debit Income summary $5 000.
D)Debit Retained earnings $5 000.

Question 80

Paying dividends causes a decrease in total share capital.