Deck 14: Companies: Formation and Shareholders Equity

Question 1

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

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

Answer 1

A

Question 2

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

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

Answer 2

D

Question 3

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

Answer 3

False

Question 4

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

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

Question 5

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

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

Question 6

Share capital consists of:

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

Question 7

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

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

Question 8

Which of the following describes retained earnings?

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

Question 9

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

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

Question 10

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

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

Question 11

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 12

Which of the following is an advantage of preference shares?

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

Question 13

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

Question 14

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 15

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

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

Question 16

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) Shareholders are not authorised to sign contracts or make business commitments on behalf of the company.
C) The liabilities of the company cannot be extended to the personal assets of the shareholder.
D) Company shares can be readily bought and sold by investors on the open market.

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

Question 18

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

Question 19

Which of the following is an advantage of preference shares?

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

Question 20

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) Shareholders are not authorised to sign contracts or make business commitments on behalf of the company.
D) The liabilities of the company cannot be extended to the personal assets of the shareholder.

Question 21

Which of the following is the correct order of accounts in the shareholders' equity section of the balance sheet?

A) Preference share capital, Ordinary share capital, Retained earnings
B) Retained earnings, Ordinary share capital, Preference share capital
C) Ordinary share capital, Preference share capital, Retained earnings
D) Ordinary share capital, Retained earnings, Preference share capital

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

Which of the following describes a retained earnings deficit?

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

Question 27

Osbourne Company issued 50 000 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 28

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

Question 29

Dallkin Company issued 10,000 ordinary shares on 1 January 2016.The shares were sold at $25 per share.The journal entry for this transaction would include a:

A) debit to Cash for $250,000and a credit to Retained earnings for $250,000
B) credit to Cash for $250,000 and a debit to Ordinary share capital for $250,000
C) credit to Cash for $250,000, a debit to Retained earnings for $10,000 and a debit to Ordinary share capital for $240,000
D) debit to Cash for $250,000 and a credit to Ordinary share capital for $250,000

Question 30

Lerner Company had the following transactions in 2016,its first year of operations.
∙ Issued 22,000 ordinary shares.The issue price of the shares was $16.00 per share.
∙ Issued 1500 preference shares for $170 per share.
∙ Earned net profit of $35,000.
∙ Paid no dividends.
At the end of 2016,what is the total amount of paid-up capital?

A) $352,000
B) $277,000
C) $642,000
D) $607,000

Question 31

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

Question 32

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

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

Question 33

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

Question 34

Lerner Company had the following transactions in 2016,its first year of operations.
∙ Issued 25,000 ordinary shares.The issue price of the shares was $18.00 per share.
∙ Issued 1200 preference shares for $200 per share.
∙ Earned net profit of $36,000.
∙ Paid no dividends.
At the end of 2016,what is the total amount of shareholders' equity?

A) $290,000
B) $690,000
C) $400,000
D) $726,000

Question 35

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

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

Question 36

Osbourne Ltd issued 90,000 ordinary shares in exchange for manufacturing equipment.The equipment was valued at $1,350,000.The shares have a market value of $0.01 per share.Which of the following is included in the journal entry to record this transaction?

A) credit Gain on sale of ordinary shares $1,440,000
B) debit Cash $1,080,000
C) credit Ordinary share capital $90,000
D) credit Ordinary share capital $1,350,000

Question 37

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

Question 38

All companies must issue both ordinary and preference shares.

Question 39

All forms and classes of shares carry voting rights.

Question 40

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 41

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

Question 42

Which of the following is the amount of shareholders' equity on the company's books for each share of its capital?

A) Book value
B) Amortised value
C) Market value
D) Liquidation value

Question 43

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

Question 44

Retained earnings represents:

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

Question 45

On 1 November 2016,Oster Company declared a dividend of $4.75 per share.Oster Ltd has 20,000 ordinary shares outstanding and no preference shares.The date of record is 15 November and the payment date is 30 November 2016.Which of the following is the journal entry needed on 30 November?

A) debit Dividends payable, ordinary $95,000 and credit Cash $95,000
B) debit Cash $95,000 and credit Dividends payable, ordinary $95,000
C) debit Retained earnings $95,000 and credit Cash $95,000
D) debit Retained earnings $95,000 and credit Dividends payable, ordinary $95,000

Question 46

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

Question 47

On 1 November 2016,Oster Ltd declared a dividend of $3.25 per share.Oster Ltd has 28,000 shares of ordinary shares outstanding and no preference shares.Which of the following is the journal entry needed to record the declaration of dividends?

A) debit Retained earnings $91,000 and credit Cash $91,000
B) debit Cash $91,000 and credit Dividends payable, ordinary $91,000
C) debit Dividends payable, ordinary $91,000 and credit Retained earnings $91,000
D) debit Retained earnings $91,000 and credit Dividends payable, ordinary $91,000

Question 48

Which of the following would be included in the entry to record the payment of a previously declared dividend of $1.75 per share on 19,500 ordinary shares?

A) Retained earnings would be credited for $34,125.
B) Cash would be debited for $34,125.
C) Dividends payable would be debited for $34,125.
D) Retained earnings would be debited for $34,125.

Question 49

Most preference shares are non-cumulative.

Question 50

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

Question 51

Which of the following is TRUE of dividends in arrears?

A) Dividends in arrears are a liability on the balance sheet.
B) Dividends in arrears are passed dividends on non-cumulative preference shares.
C) Dividends in arrears are passed dividends on ordinary shares.
D) Dividends in arrears are passed dividends on cumulative preference shares.

Question 52

On 1 November 2016,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 2016.Which of the following statements is TRUE about the date of record?

A) The company transfers cash to a stockbroking firm on the date of record.
B) Cash is disbursed to shareholders on the date of record.
C) The liability must be recorded on the date of record.
D) No journal entry is made on the date of record.

Question 53

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

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

Question 54

Which of the following is the correct description of dividends in arrears,as it applies to cumulative preference shares?

A) The amount of dividends that will be paid in the coming year
B) The cumulative amount of dividends which were not paid in previous years
C) The amount of dividends that were paid late
D) The cumulative amount of dividends that were paid in previous years

Question 55

A company declares a dividend of $0.75 per share on 11,000 ordinary shares.Which of the following would be included in the entry to record the declaration?

A) Dividends payable, ordinary would be debited for $8250
B) Ordinary share capital would be credited for $8250
C) Retained earnings would be credited for $8250
D) Retained earnings would be debited for $8250

Question 56

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

Question 57

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

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

Question 58

Which of the following is the amount guaranteed to preference shareholders in the event the company goes out of business?

A) Book value
B) Market value
C) Amortised value
D) Liquidation value

Question 59

The book value of ordinary shares is equal to the total equity less the book value of preference shares,divided by the number of ordinary shares outstanding.

Question 60

Which of the following is the price for which a person can buy or sell a share of shares?

A) Market value
B) Amortised value
C) Book value
D) Liquidation value

Question 61

A company's income tax expense is calculated on the basis of book profit,but the income tax payable amount is based on the:

A) amount of taxable income, as calculated on the income tax return.
B) amount of dividends paid to shareholders.
C) amount of payroll tax that has not been paid yet.
D) GST rate applied to sales revenues.

Question 62

Normally,a company's book profit and taxable income should be the same.

Question 63

The rate of return on total assets and the rate of return on ordinary shareholders' equity are used to evaluate the:

A) liquidity of the business.
B) cash flow of the business.
C) ability to pay current liabilities with current assets.
D) profitability of the business.

Question 64

Deferred tax can either be an asset or a liability.

Question 65

Deferred tax would normally arise from which of the following situations?

A) When a company pays off all of its debts at the end of the year
B) When a company pays income tax quarterly versus yearly
C) When a company makes a different choice for its tax return versus its book net profit
D) When a company withholds income tax from its employees' payroll

Question 66

Revival Company's annual report is follows.
$$\begin{array} { | l | l | l | } \hline & 31 \text { March 2016 } & 31 \text { March 2017 } \\\hline \text { Net profit } & \$ 352,000 & \$ 432,500 \\\hline \text { Preference dividends } &0 & 0 \\\hline \text { Total shareholders' equity } & \$ 4,360,000 & \$ 5,222,000 \\\hline \begin{array} { l } \text { Shareholders' equity attributable to } \\\text { preference shares }\end{array} &0 &0 \\\hline \text { Number of ordinary shares outstanding } & 288,000 & 201,000\\\hline\end{array}$$
Based on the information provided,find the rate of return on ordinary shareholders' equity on 31 March 2017.

A) 9.03%
B) 8.07%
C) 9.07%
D) 8.28%

Question 67

If a company has a strong rate of return on ordinary shareholders' equity,that is an indication of good cash flow.

Question 68

Which of the following shows the relationship between net profit available to ordinary shareholders and average ordinary equity?

A) The rate of return on ordinary shareholders' equity
B) Inventory turnover
C) Profit
D) The rate of return on total assets

Question 69

Which of the following measures a company's success in using assets to earn profit?

A) Days' sales in receivables
B) The rate of return on total assets
C) The rate of return on shareholders' equity
D) Inventory turnover

Question 70

Which of the following factors may cause a difference between book profit and taxable income?

A) The company has a deposit in transit at year-end.
B) The company sells shares right before the end of the year.
C) The company uses straight-line depreciation for books and accelerated depreciation for tax.
D) The company pays its federal income taxes quarterly as opposed to annually.

Question 71

If a company has a strong rate of return on total assets,that shows that they can easily pay off their current liabilities with their current assets.

Question 72

If a company has a strong rate of return on ordinary shareholders' equity,that is an indication of strong profitability.