Deck 13: Organization and Operation of Corporations

Question 1

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

Answer 1

True

Question 2

Reporting procedures are the same for private and public corporations.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

Net incomes or losses are recorded in a share capital account.

Question 9

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

Question 10

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

Question 11

Income tax expense is recorded with the operating expenses on the income statement for a corporation.

Question 12

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

Question 13

The shareholders can vote to pay themselves a dividend.

Question 14

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 called shareholders' equity because the equity belongs to a group of owners known as shareholders.

Question 15

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

Question 16

A corporation is a legal entity separate from its owners.

Question 17

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

Question 18

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

Question 19

Corporations can be either public or limited.

Question 20

Authorized shares are the total number of shares outstanding.

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

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

Question 26

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

Question 27

The declaration of cash dividends reduces retained earnings.

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

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 33

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

Question 34

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 35

Shares are most commonly issued for cash.

Question 36

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

Question 37

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

Question 38

Common shares usually carry a preference for dividends.

Question 39

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

Question 40

Unpaid preferred dividends are called dividends in arrears.

Question 41

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

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

Question 42

The par value of a share is:

A) Another name for the call price of a share.
B) A type of callable share.
C) The market value of the shares on the date of issuance.
D) An unpaid dividend.
E) An arbitrary value a corporation places on each of the corporation's shares.

Question 43

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

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

Question 44

The accounting equation for a corporation is:

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

Question 45

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

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

Question 46

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

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

Question 47

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

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

Question 48

A proxy is:

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

Question 49

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

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

Question 50

Buying shares in a corporation is attractive to investors because:

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

Question 51

Common shares:

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

Question 52

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

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

Question 53

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

Question 54

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

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

Question 55

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) Contributed capital.
C) Organization costs.
D) Financial leverage.
E) Prepaid expenses.

Question 56

Owners of preferred shares often do not have:

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

Zach Sports Ltd has 1,000 shares of $5.50,cumulative preferred shares and 10,000 common 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) $1,000.
B) $3,500.
C) $4,500.
D) $10,000.
E) $12.000.

Question 62

A dividend preference for preferred shares means that:

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

Question 63

Ken Corp declared a 0.60 per share common dividend.The company has 20,000 common shares authorized,with 6,000 shares issued and outstanding.A possible journal entry to record the declaration is:

A)

B)

C)

D)

E)

Question 64

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

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

Question 65

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

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

Question 66

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

Question 67

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

Question 68

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

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

Question 69

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

Question 70

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

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

Question 71

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) Date of payment.
E) Liquidating datE.

Question 72

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

Question 73

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 of operation,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 would include:

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

Question 74

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

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

Question 75

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 the corporation's net income for the year?

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

Question 76

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) Increase the return of common shareholders.
C) Appeal to investors who do not want to invest in common shares.
D) If the preferred shares are convertible,they are more attractive to potential investors.
E) Preferred dividends are paid before common dividends.

Question 77

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 the assets invested in the corporation by the preferred shareholders or creditors is called:

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

Question 78

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

Question 79

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

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

Question 80

Preferred shares may be issued instead of common shares:

A) To increase financial leverage.
B) To prevent dilution of voting ownership.
C) To appeal to investors who believe that common shares are too risky.
D) To increase the return earned by common shareholders.
E) All of these answers are correct.