Deck 28: Forms of Business Organization

Question 1

Closely held corporations have the same ability to qualify for credit sources as publicly traded corporations.

Answer 1

False

Question 2

Retained earnings are a fund of cash the business has earned from profitable operations.

Answer 2

False

Question 3

A corporation is a legal entity that may enter into contracts, may sue or be sued, and is responsible for its own debts.

Answer 3

True

Question 4

The ability of a sole proprietorship to pay its debts may be determined by the financial strength of the owner.

Question 5

When a corporation receives cash or other assets from its owners in a sale of capital stock, it records these investment transactions by crediting Retained Earnings.

Question 6

A corporation, as well as a partnership, must file a corporate income tax return and pay tax on its earnings.

Question 7

Shareholders report and pay income tax on dividends received from a corporation.

Question 8

A partnership has a limited life and each partner has unlimited personal liability.

Question 9

The adjusting entry to record income taxes in an unprofitable period would debit Income Tax Payable and credit Income Tax Expense.

Question 10

Personal liability of the owners for any business debts is an important consideration when selecting an appropriate form of business organization.

Question 11

The salaries paid to partners are shown as an expense on the income statement while the salary taken by a sole proprietor is debited to a drawing account.

Question 12

Every stockholder in a corporation will have a drawing account that will be closed to retained earnings during the closing process.

Question 13

Mutual agency refers to the ability of each partner to withdraw cash and other assets at will.

Question 14

When a sole proprietorship incorporates, the assets of the new business are recorded at cost.

Question 15

In a limited liability partnership, a partner has unlimited liability for his own actions and limited liability for the actions of his partners.

Question 16

The entry to record the issuance of 100 shares of capital stock in exchange for $1,000 cash includes a debit to Capital Stock.

Question 17

Limited personal liability is a characteristic of a sole proprietorship.

Question 18

When closing Income Summary, assuming the corporation had net income for the accounting period, the account Retained Earnings is credited.

Question 19

Stockholders of an S corporation pay taxes on their share of the corporate net income whether they receive it or not.

Question 20

The assets of a partnership belong jointly to all the partners while the assets of a sole proprietorship belong to the proprietorship.

Question 21

In a sole proprietorship the balance in the Income Summary account is closed to:

A) Retained earnings.
B) Capital.
C) Drawing.
D) Net Income.

Question 22

Which of the following is a characteristic of a corporation?

A) Mutual agency.
B) Stockholder liability for business debts.
C) Indefinite existence.
D) Taxable at individual rates.

Question 23

Retained Earnings represent:

A) The profits of the company.
B) The investments of the owners.
C) The profits of the company plus the investments of the owners.
D) The total earnings of the company, less the dividends distributed to the owners and less any losses.

Question 24

Net income in a partnership may not be distributed to the partners:

A) As a salary allowance.
B) As interest on beginning capital.
C) In a fixed ratio.
D) In the form of dividends.

Question 25

The Board of Directors of a corporation:

A) Are not responsible for hiring other professional managers.
B) Do not decide whether profits will be distributed to stockholders.
C) Make major policy decisions.
D) Are members of a government agency.

Question 26

Sally Smythe enters into a partnership by contributing the following: Cash $15,000; Accounts Receivable $4,500; Machinery which cost $3,000 and has a fair market value of $2,125; and accounts payable of $1,200. What amount will be recorded in her capital account?

A) $21,625.
B) $20,425.
C) $22,500.
D) $21,300.

Question 27

The adjusting entry to recognize income taxes due on a profit of $100,000 and a tax rate of 40% is:

A) A Above.
B) B Above.
C) C Above.
D) D Above.

Question 28

Double Taxation means:

A) A corporation must pay double the amount of tax that an unincorporated business pays.
B) A corporation pays taxes to the federal government and to the state government.
C) The corporation pays tax on its income and the stockholders pay tax on their dividends.
D) The corporation pays tax on its income and the officers of the corporation pay tax on their salaries.

Question 29

The net income of a sole proprietorship should compensate the owner for all of the following except:

A) Personal service.
B) The income taxes paid by the owner.
C) Capital invested by the owner.
D) The risk taken by the owner.

Question 30

Regardless of whether partners in a partnership work in the company, each partner is allocated an
equal share of profits.

Question 31

When deciding the form of organization of a new business the factors to consider would be all of the following except:

A) The need to raise large amounts of capital.
B) The need for continuity in business operations.
C) The potential profits of the organization.
D) The personal liabilities of the owners.

Question 32

Assets contributed to a partnership by a partner would be recorded at:

A) Historical cost.
B) Fair market value.
C) Cost less depreciation.
D) Potential value.

Question 33

Income taxes to a partnership:

A) Are an obligation of the partnership.
B) Are an obligation to each partner only when cash is received.
C) Are an obligation to each partner based on their share of profits.
D) Are not an obligation to each partner since a partnership does not pay tax.

Question 34

Which of the following is a characteristic of a corporation?

A) Declaration of a dividend by the stockholders.
B) Appointment of officers by the stockholders.
C) Transferability of shares of stock.
D) Unlimited liability.

Question 35

Salary allowances to partners when dividing net income:

A) Are not expenses of the business.
B) Do not get recorded.
C) Are recorded.
D) Are not accounted for.

Question 36

The journal entry when a dividend is declared for $150,000 would be:

A) A Above.
B) B Above.
C) C Above.
D) D Above.

Question 37

In order to form a corporation, the corporation must obtain a charter from:

A) The federal government.
B) A state government.
C) The Securities and Exchange Commission.
D) The stockholders of the corporation.

Question 38

When a corporation declares a dividend:

A) Assets decrease, liabilities increase.
B) Retained earnings increase, liabilities increase.
C) Liabilities increase, retained earnings decrease.
D) Retained earnings decrease, assets increase.

Question 39

Paid-in Capital refers to:

A) The lifetime earnings of the corporation.
B) The amount invested by stockholders.
C) Net income less dividends.
D) The amount in excess of the par value of the stock.

Question 40

Partner A earns $68,000 from a partnership. Partner B earns $57,000 but withdraws only $49,000. How much must Partner B report in his income tax return as income?

A) $49,000.
B) $57,000.
C) $125,000.
D) $117,000.

Question 41

X Corporation had a net income of $375,000 in 2011. The Board of Directors declared a dividend of $0.25 a share on the 150,000 shares outstanding on December 13 to be paid on December 23. Retained earnings on January 01, 2012 were $630,000.
(a) Prepare the journal entries for the declaration of the dividends and for the payment of these dividends.
(b) Prepare the Retained Earnings Statement at the end of 2011.

Question 42

Stewart and Brooke form a partnership. Stewart invests $80,000 and Brooke invests $120,000. If there are any profits or losses they will share them as follows:
They will each receive a salary of $25,000.
Any remaining amount will be allocated ¾ to Brooke and ¼ to Stewart.
(1) If the partnership income for the year is $115,000 what amount will be allocated to Brooke?
(2) If the partnership income for the year is $125,000 what amount will be allocated to Stewart?
(3) If the partnership income for the year is $45,000 what amount will be allocated to Stewart and what amount to Brooke?

Question 43

Listed below are several accounting terms introduced in this section.
Each of the following statements may (or may not) describe one of these accounting terms. In the space provided, indicate the term described, or enter "none" if the statement does not correctly describe any of the terms.
_________ (A.) An unincorporated business owned by one person.
_________ (B.) An example of an organized securities market.
_________ (C.) The right of each partner to negotiate binding contracts.
_________ (D.) The total earnings of a corporation less dividends paid out.
_________ (E.) Investments by the owners of a corporation.
_________ (F.) A partnership where one or more partners are not personally liable for the debts of the partnership.
_________ (G.) An organization that serves the professional needs of a CPA.
_________ (H.) A business that is responsible for its own debts and which pays income taxes on its earnings.
_________ (I.) An unincorporated business owned by two or more people.
_________ (J.) A corporation whose shares are not publicly traded.

Question 44

C, D, and E are partners. C has $25,000 in her capital account. D has $35,000 in hers, and E has $45,000. Each gets a salary allowance of $15,000. C gets 10% interest on the beginning balance in the capital account, D gets 12%, and E gets 14%. The remainder is divided 20% to C, 35% to E, and 45% to
E. What is the balance in the capital account at the end of the year if net income was $80,000?

Question 45

When evaluating the liquidity of a proprietorship, creditors will likely base their decision on:

A) The business ability to generate a profit.
B) Previous debts of the business.
C) The financial strength of the owner.
D) The total assets owned by the business.

Question 46

Grey, Dailey, and Sanders have formed a partnership. Net income for the first year amounted to $50,400. The partnership agreement states that Grey will receive a salary of $10,000, Dailey will receive $15,000, and Sanders will receive $20,000. They each have capital accounts of $30,000, $40,000, and $50,000 respectively. The contract calls for interest of 12% of their beginning capital balances for each partner. Any profit or loss will be split equally. How much income will each partner receive?

Question 47

John's Metalworks Incorporated recently issued 10,000 shares of stock in exchange for $100,000. Metalworks' journal entry to record this transaction included:

A) A debit to Capital Stock for $10,000.
B) A debit to Cash for $100,000.
C) A credit to Capital Stock for $10,000.
D) A credit to Cash for $100,000.

Question 48

When evaluating the liquidity of a partnership, creditors will likely base their decision on:

A) the business ability to generate a profit.
B) previous debts of the business.
C) the total assets owned by the business.
D) the financial strength of the owners.

Question 49

The retained earnings account of Company XYZ has a balance of $350,000 at the end of 2010. At the end of 2011 the following information is available.
What is the amount of retained earnings at the end of 2011?

Question 50

Sue and Al form a partnership. Sue invests $20,000 and Al invests $25,000. In the first year the partnership earns $60,000. Sue withdraws $7,500 and Al withdraws $12,000. Each receives a salary of $15,000 and the remainder is divided 60% to Al and 40% to Sue. Prepare a schedule showing the capital accounts for Sue and Al.

Question 51

An S corporation must have a maximum of ____ stockholders.

A) 25.
B) 65.
C) 70.
D) 75.

Question 52

A and B are partners. A has $50,000 in his capital account and B has $75,000 at the beginning of the year. A receives a salary of $15,000 and B receives $12,000. Each partner receives 5% of the beginning balance of their capital accounts. The remainder is split 45% to A and 55% to
B. Net income for the year was $125,000. What is the amount of each capital account at year-end?