Deck 8: Proprietorships, Partnerships, and Corporations

Question 1

In a closely held corporation, exchanges of stock are limited to transactions between individuals.

Answer 1

True

Question 2

Preferred stockholders generally have no voting rights in a corporation.

Answer 2

True

Question 3

The class or type of stock that every corporation must have is preferred stock.

Answer 3

False

Question 4

A separate capital account would be maintained for each partner in a partnership.

Question 5

Van Buren Corporation issued 5,000 shares of $6 par common stock for $24 per share. For this transaction, Common Stock should be increased for $120,000.

Question 6

The balance sheet of a sole proprietorship will report two equity accounts: one for amounts contributed by the owner, and one for the earnings of the business.

Question 7

Proprietorships are not separate legal entities; their earnings are taxable to the owners and not to the business itself.

Question 8

Articles of incorporation, prepared by a business that wishes to incorporate, normally include the corporation's name and purpose, its location, and provisions for capital stock.

Question 9

A distribution by a sole proprietorship to the owner is called a withdrawal.

Question 10

A partner is responsible for his/her own actions, but not for actions taken by another partner on behalf of the partnership.

Question 11

The book value of a share of stock is equal to the market or selling price of the stock.

Question 12

The number of shares of stock outstanding generally is greater than the number of shares of stock issued.

Question 13

All corporations are subject to extensive government regulation.

Question 14

Preferred stockholders' claims to a corporation's assets take precedence over the claims of some creditors.

Question 15

Liability is a significant disadvantage of the partnership form of business organization.

Question 16

A benefit of corporations is that they are free from double taxation.

Question 17

The stock market crash of 1929 and the subsequent Great Depression resulted in the beginning of extensive regulation of corporations.

Question 18

A corporation is a legal entity created by the authority of a state government, separate and distinct from its owners.

Question 19

The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002.

Question 20

Lack of ease in transferability of ownership is one of the important disadvantages of the corporate form of business organization.

Question 21

Which of the following is a disadvantage of a sole proprietorship?

A) Entrenched management.
B) Double taxation.
C) Unlimited liability.
D) Excessive regulation.

Question 22

One of the common reasons that a company purchases its own stock is to decrease its earnings per share.

Question 23

A corporation might buy some of its own stock to help keep the market price from falling.

Question 24

Chisolm Corporation issued 10,000 shares of $5 par common stock for $22 per share. As a result of this transaction, Chisolm's legal capital increased by $50,000.

Question 25

When a corporation records a stock dividend, it decreases the retained earnings account for the par value of the stock.

Question 26

A corporation must record a liability for cash dividends on the date of record.

Question 27

The term "Retained Earnings" is best explained by which of the following statements?

A) Money set aside for the redemption of bonds.
B) The difference between total revenue and total expenses in an accounting period.
C) Cash retained in a separate bank account designated for emergency uses.
D) A measure of capital generated through earnings.

Question 28

A company may retain some or all of the earnings to finance growth and increase its potential for future earnings.

A) Sole proprietorship
B) Partnership
C) Corporation
D) None of these

Question 29

An appropriation of retained earnings places a limit on the amount of dividends a corporation can declare.

Question 30

Treasury Stock is reported on the balance sheet between liabilities and stockholders' equity.

Question 31

Which of the following entities would report income tax expense on its income statement?

A) A sole proprietorship.
B) A corporation.
C) A partnership.
D) All of these answer choices are correct.

Question 32

Which of the following is not considered an advantage of the corporate form of business organization?

A) Ability to raise capital.
B) Continuity of existence.
C) Ease of transferability of ownership.
D) Lack of government regulation.

Question 33

Fred and Barney started a partnership. Fred invested $17,000 in the business and Barney invested $25,500. The partnership agreement stipulated that profits would be divided as follows: Each partner would receive a 8% return on invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $38,000 during an accounting period, the amount of income assigned to the two partners would be: $\begin{array}{cc} &\text { Fred} && \text { Barney } \\\end{array}$
A. $\begin{array}{cc} \$15,940 & \$15,260 \\\end{array}$

B. $\begin{array}{cc} \$17,000 & \$21,000 \\\end{array}$

C. $\begin{array}{cc} \$19,000 & \$19,000 \\\end{array}$

D. $\begin{array}{cc} \$18,660 & \$19,340\\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 34

Powell Corporation had $10 par stock with a market price of $60, when it declared a 2-for-1 stock split. After the stock split, the number of shares outstanding will double, and the market price of the stock should drop to about $30.

Question 35

Fred and Barney started a partnership. Fred invested $20,000 in the business and Barney invested $32,000. The partnership agreement stipulated that profits would be divided as follows: Each partner would receive a 15% return on invested capital with the remaining income being distributed equally between the two partners. Assuming that the partnership earned $38,000 during an accounting period, the amount of income assigned to the two partners would be: $\begin{array}{cc} &\text { Fred} && \text { Barney } \\\end{array}$
A. $\begin{array}{cc} \$20,500 & \$17,500 \\\end{array}$

B. $\begin{array}{cc} \$20,000 & \$18,000 \\\end{array}$

C. $\begin{array}{cc} \$19,000 & \$19,000 \\\end{array}$

D. $\begin{array}{cc} \$18,100 & \$19,900\\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 36

Which of the following statements about types of business entities is true?

A) For accounting purposes a sole proprietorship is not a separate entity from its owner.
B) Ownership in a partnership is represented by having shares of capital stock.
C) One advantage of a corporation is ability to raise capital.
D) Sole proprietorships are subject to double taxation.

Question 37

A purchase of treasury stock is an asset use transaction.

Question 38

The term "double taxation" refers to which of the following?

A) Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on the dividends they receive from the corporation.
B) In a partnership, both partners are required to claim their share of net income on their tax returns.
C) A sole proprietorship must pay income taxes on its net income and the owner is also required to pay income taxes on withdrawals.
D) A sole proprietorship must pay income taxes to both the state government and the federal government.

Question 39

Which of the following entities would have a paid-in capital in excess of par (or stated) value account in the equity section of the balance sheet?

A) A corporation.
B) A municipality.
C) A sole proprietorship.
D) A partnership.

Question 40

Weller Corporation issued 10,000 shares of no-par common stock for $25 per share. This event increases the common stock account by $250,000.

Question 41

Blair Scott started a sole proprietorship by depositing $40,000 cash in a business checking account. During the accounting period the business borrowed $20,000 from a bank, earned $5,800 of net income, and Scott withdrew $7,000 cash from the business. Based on this information, at the end of the accounting period Scott's capital account contained a balance of:

A) $45,800.
B) $41,200.
C) $58,800.
D) $38,800.

Question 42

Flagler Corporation shows a total of $625,000 in its common stock account and $1,100,000 in its paid-in capital in excess of par value − common stock account. The par value of Flagler's common stock is $5. How many shares of Flagler stock have been issued?

A) 220,000.
B) 345,000.
C) 125,000.
D) It cannot be determined

Question 43

Blair Scott started a sole proprietorship by depositing $75,000 cash in a business checking account. During the accounting period the business borrowed $30,000 from a bank, earned $18,000 of net income, and Scott withdrew $12,000 cash from the business. Based on this information, at the end of the accounting period Scott's capital account contained a balance of:

A) $93,000.
B) $111,000.
C) $72,000.
D) $81,000.

Question 44

At the end of the accounting period, Houston Company had $6,400 of par value common stock issued, additional paid-in capital in excess of par value − common of $7,900, retained earnings of $7,000, and $4,000 of treasury stock. The total amount of stockholders' equity is:

A) $25,300.
B) $10,300.
C) $18,900.
D) $17,300.

Question 45

On January 2, Year 1, Torres Corporation issued 16,000 shares of $12 par-value common stock for $16 per share. Which of the following statements is true?

A) The common stock account will increase by $256,000.
B) The cash account will increase by $192,000.
C) Total stockholders' equity will increase by $192,000.
D) The paid-in capital in excess of par value account will increase by $64,000.

Question 46

When the common stock account is disclosed on the balance sheet, it is reported at:

A) current market value.
B) average issue price.
C) par or stated value.
D) lower of cost or market.

Question 47

Which of the following is not normally a preference given to the holders of preferred stock?

A) The right to receive a specified amount of dividends prior any being paid to common stockholders.
B) The right to vote before the common stockholders at the corporation's annual meeting.
C) The right to receive preference over common stockholders as to the distribution of assets during a liquidation process.
D) All of these are preferences given to preferred stock.

Question 48

Flagler Corporation shows a total of $660,000 in its common stock account and $1,600,000 in its paid-in capital in excess of par value − common stock account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued?

A) 117,500
B) 200,000
C) 82,500
D) It cannot be determined

Question 49

Ogilvie Corporation issued 17,000 shares of no-par stock for $20 per share. Ogilvie was authorized to issue 40,000 shares. What effect will this event have on the company's financial statements?

A) Increase assets by $800,000, increase stockholders' equity by $800,000.
B) Increase assets by $340,000, increase stockholders' equity by $340,000.
C) Increase cash flow from investing activities by $340,000.
D) None of these answer choices are correct.

Question 50

Which of the following terms designates the maximum number of shares of stock that a corporation may issue?

A) Number of shares issued
B) Number of shares authorized
C) Par value
D) Number of shares outstanding

Question 51

Which of the following statements best describes the term "par value?"

A) The number of shares currently in the hands of stockholders.
B) The amount that must be paid to purchase a share of stock.
C) Determined by dividing total stockholders' equity by the number of shares of stock.
D) An amount used in determining a corporation's legal capital.

Question 52

On February 2, Year 1, the Farmer Corporation issued 9,000 shares of no-par stock for $17 per share. The next day, the stock's price jumped on the New York Stock Exchange to $21 per share. Which of the following answers describes the effect of the February 2, Year 1 transaction?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 53

The par value of a company's stock:

A) dictates the initial price of the stock.
B) may be revised each time a company issues more shares of stock.
C) is generally greater than market value.
D) has little connection to the market value of the stock.

Question 54

Ix Company issued 20,000 shares of $20 par value common stock at a market price of $32. As a result of this accounting event, the amount of stockholders' equity would:

A) increase by $640,000.
B) be unaffected.
C) increase by $240,000.
D) increase by $400,000.

Question 55

Ix Company issued 32,000 shares of $10 par value common stock at a market price of $29. As a result of this accounting event, the amount of stockholders' equity would:

A) increase by $928,000.
B) be unaffected.
C) increase by $320,000.
D) increase by $608,000.

Question 56

On January 12, Year 1, Gilliam Corporation issued 550 shares of $12 par-value common stock for $15 per share. The number of shares authorized is 5,000, and the number of shares outstanding prior to this transaction is 1,200. Which of the following answers describes the effect of the January 12, Year 1 transaction?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 57

Where is treasury stock reported on a corporation's balance sheet?

A) As an addition to total paid-in capital
B) As a deduction from total stockholders' equity, following retained earnings
C) As a deduction from total paid-in capital
D) As a deduction from retained earnings

Question 58

Ogilvie Corporation issued 12,000 shares of no-par stock for $40 per share. Ogilvie was authorized to issue 35,000 shares. What effect will this event have on the company's financial statements?

A) Increase assets by $1,400,000, increase stockholders' equity by $1,400,000.
B) Increase assets by $480,000, increase stockholders' equity by $480,000.
C) Increase cash flow from investing activities by $480,000.
D) None of these answer choices are correct.

Question 59

At the end of the accounting period, Houston Company had $12,000 of par value common stock issued, additional paid-in capital in excess of par value − common of $11,000, retained earnings of $12,000, and $4,000 of treasury stock. The total amount of stockholders' equity is:

A) $37,000.
B) $39,000.
C) $19,000.
D) $31,000.

Question 60

On January 2, Year 1, Torres Corporation issued 20,000 shares of $10 par-value common stock for $11 per share. Which of the following statements is true?

A) The common stock account will increase by $220,000.
B) The cash account will increase by $200,000.
C) Total stockholders' equity will increase by $200,000.
D) The paid-in capital in excess of par value account will increase by $20,000.

Question 61

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $151,900 and $201,400 respectively. Also during Year 1, the corporation declared and paid cash dividends of $20,600 and issued stock dividends valued at $16,000. Total expenses were $37,416. Based on this information, what was the amount of total revenue for Year 1?

A) $143,384
B) $107,516
C) $123,516
D) $131,300

Question 62

Vailes Company reissued 200 shares of its treasury stock. The treasury stock originally cost $25 per share and was reissued for $35 per share. Which of the following accurately reflects how the reissue of the treasury stock would affect Vailes's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 63

Montana Company was authorized to issue 200,000 shares of common stock. The company had issued 50,000 shares of stock when it purchased 10,000 shares of treasury stock. The number of outstanding shares of common stock was:

A) 190,000.
B) 60,000.
C) 40,000.
D) 50,000.

Question 64

Montana Company was authorized to issue 90,000 shares of common stock. The company had issued 33,000 shares of stock when it purchased 5,000 shares of treasury stock. The number of outstanding shares of common stock was:

A) 85,000.
B) 38,000.
C) 28,000.
D) 33,000.

Question 65

Which answer would represent the financial statement presentation of the stockholders' equity section on the balance sheet after the following transactions?1) Issued 200 shares of $20 par value common stock for $50 a share. Five hundred shares are authorized.2) Purchased 75 shares of treasury stock at $44 a share.

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 66

Llewelyn Company purchased 1,000 shares of its own $10 par value common stock when the market price of the stock was $36 per share. How would this event affect the company's financial statements?

A) Increase the treasury stock account and increase the paid-in capital account in excess of par value − common account by $10,000.
B) Increase the treasury stock account and decrease the cash account by $36,000.
C) Increase the treasury stock account by $36,000, increase the common stock account by $10,000, and increase the paid-in capital account in excess of par value − common account by $26,000.
D) Increase the cash account by $36,000, decrease the treasury stock account by $10,000, and increase the paid-in capital account in excess of par − Common account by $26,000.

Question 67

Curtain Company paid dividends of $7,000; $11,000; and $14,000 during Year 1, Year 2, and Year 3, respectively. The company had 1,400 shares of 7.0%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

A) $9,800.
B) $4,000.
C) $2,600.
D) $2,800.

Question 68

Curtain Company paid dividends of $6,000; $12,000; and $20,000 during Year 1, Year 2, and Year 3, respectively. The company had 1,000 shares of 5%, $200 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

A) $4,000.
B) $6,000.
C) $8,000.
D) $10,000.

Question 69

Which of the following statements is a reason why a company would buy treasury stock?

A) Because management believes the market price of stock is undervalued.
B) To have stock available to issue to employees in stock option plans.
C) To avoid a hostile takeover.
D) All of these are reasons a company would buy treasury stock.

Question 70

For Year 1, the Sacramento Corporation had beginning and ending Retained Earnings balances of $208,054 and $231,012 respectively. Also during Year 1, the corporation declared and paid cash dividends of $29,000 and issued stock dividends valued at $16,000. Total expenses were $32,916. Based on this information, what was the amount of total revenue for Year 1?

A) $68,158
B) $143,154
C) $100,874
D) $179,132

Question 71

On March 1, Year 1, Gilmore Incorporated declared a cash dividend on its 1,500 outstanding shares of $50 par value, 6% preferred stock. The dividend will be paid on May 1, Year 1 to the stockholders of record as of April 1, Year 1.Which of the following reflects the financial statement effects on the May 1, Year 1 date of payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 72

Which of the following is a negative or contra equity account?

A) Retained earnings
B) Paid-in capital in excess of par value
C) Treasury stock
D) Appropriated retained earnings

Question 73

Helena Corporation declared a 2-for-1 stock split on 8,000 shares of $6 par value common stock. If the market price of the stock had been $25 a share before the split, the par value, number of shares, and approximate market value after the split would be: $\begin{array}{ccc}\text { Par value}&\text { Number of Shares }&\text { Market Value }\\\end{array}$
A. $\begin{array}{ccc}&\$ 6.00 &&& 16,000 &&&&&& \$ 12.50 \\\end{array}$

B. $\begin{array}{ccc}&\$ 6.00 &&& 8,000 &&&&&&& \$ 25.50 \\\end{array}$

C. $\begin{array}{ccc}&\$ 3.00 &&& 16,000 &&&&&& \$ 12.50 \\\end{array}$

D. $\begin{array}{ccc}&\$ 3.00 &&& 16.000 &&&&&& \$ 25.00\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 74

Which of the following statements about the impact of treasury stock on the amounts reported on the balance sheet is correct?

A) The balance in the treasury stock account increases paid-in capital.
B) The balance in the treasury stock account reduces paid-in capital.
C) The balance in the treasury stock account reduces total stockholders' equity.
D) The balance in the treasury stock reduces retained earnings.

Question 75

Kellogg, Incorporated purchased 200 shares of its own $20 par value stock for $30 cash per share. Which of the following answers reflects how this purchase of treasury stock would affect Kellogg's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 76

Chandler Company declared and paid a cash dividend. Which of the following choices accurately reflects how this event would affect the company's financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 77

The issuance of a stock dividend will:

A) decrease total assets.
B) increase retained earnings.
C) decrease paid-in capital.
D) not affect total equity.

Question 78

What effect will the declaration and distribution of a stock dividend have on net income and cash flows? $\begin{array}{cc}\text { Net Income } & \text { Cash Flows } \\\end{array}$

A. $\begin{array}{cc}\text { Not affected } & \text { Not affectec } \\\end{array}$

B. $\begin{array}{cc}\text { Not affected } & \text { Decrease }\end{array}$

C. $\begin{array}{cc}\text { Increase} &&& \text { Decrease }\end{array}$

D. $\begin{array}{cc}\text { Decrease} &&& \text { Decrease }\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 79

On March 1, Year 1, Gilmore Incorporated declared a cash dividend on its 1,500 outstanding shares of $50 par value, 6% preferred stock. The dividend will be paid on May 1, Year 1 to the stockholders of record as of April 1, Year 1.How will the entry to record the dividend on March 1 affect the financial statements?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 80

The payment of a previously declared cash dividend will:

A) decrease assets and equity.
B) increase liabilities and decrease equity.
C) decrease liabilities and increase equity.
D) None of these answer choices are correct.