Chapter 11—Corporations: Organization, Stock Transactions, and
Dividends Key
1. Twenty percent of all businesses in the United States are corporations and they account for 80% of the total
business dollars generated.
2. A corporation is a separate entity for accounting purposes but not for legal purposes.
3. The financial loss that each stockholder in a corporation can incur is usually limited to the amount invested
by the stockholder.
4. Under the Internal Revenue Code, corporations are required to pay federal income taxes.
5. Double taxation is a disadvantage of a corporation because the same party has to pay taxes twice on the
income.
6. The initial owners of stock of a newly formed corporation are called directors.
7. While some businesses have been granted charters under state laws, most businesses receive their charters
under federal laws.
8. Organizational expenses are classified as intangible assets on the balance sheet.
9. The two main sources of stockholders’ equity are investments contributed by stockholders and net income
retained in the business.
10. Retained earnings represents past net incomes less past dividends, therefore any balance in this account
would be listed on the income statement.
11. The balance in Retained Earnings at the end of the period is created by closing entries.
12. The balance in Retained Earnings should be interpreted as representing surplus cash left over for dividends.
13. A deficit in Retained Earnings is reported in the stockholders’ equity section of the balance sheet.
14. When no-par common stock with a stated value is issued for cash, the common stock account is credited for
an amount equal to the cash proceeds.
15. The par value of common stock must always be equal to its market value on the date the stock is issued.
16. For accounting purposes, stated value is treated the same way as par value.
17. The issuance of common stock affects both paid-in capital and retained earnings.
18. The main source of paid-in-capital is from issuing stock.
19. The number of shares of outstanding stock is equal to the number of shares authorized minus the number of
shares issued.
20. The amount of capital paid in by the stockholders of the corporation is called legal capital.
21. If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividends per share
would be $4.
22. If 50,000 shares are authorized, 41,000 shares are issued, and 2,000 shares are reacquired, the number of
outstanding shares is 43,000.
23. Preferred stockholders must receive their current year dividends before the common stockholders can
receive any dividends.
24. If a corporation is liquidated, preferred stockholders are paid before the creditors and before the common
stockholders.
25. Paid-in capital may originate from real estate donated to the corporation.
26. The par value of stock is an arbitrary per share amount defined in many states as legal capital.
27. A large public corporation normally uses registrars and transfer agents to maintain records of the
stockholders.
28. When common stock is issued in exchange for land, the land should be recorded in the accounts at the par
amount of the stock issued.
29. When a corporation issues stock at a premium, it reports the premium as an other income item on the
income statement.
30. When no-par stock is issued, the Common Stock account is credited for the selling price of the stock issued.
31. A large retained earnings account means that there is cash available to pay dividends.
32. When the board of director’s declares a cash or stock dividend, this action decreases retained earnings.
33. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash
dividend of $1 per share would amount to $15,000.
34. Cash dividends are normally paid on shares of treasury stock.
35. The declaration of a cash dividend decreases a corporation’s stockholders equity and decreases its assets.
36. One of the prerequisites to paying a cash dividend is sufficient retained earnings.
37. Cash dividends become a liability to a corporation on the date of record.
38. The declaration and issuance of a stock dividend does not affect the total amount of a corporation’s assets,
liabilities, or stockholders’ equity.
39. The declaration of a stock dividend decreases a corporation’s stockholders’ equity and increases its
liabilities.
40. Before a stock dividend can be declared or paid, there must be sufficient cash.
41. The day on which the board of directors of the corporation distributes a dividend is called the declaration
date.
42. The stock dividends distributable account is listed in the current liability section of the balance sheet.
43. A prior period adjustment should be reported as an adjustment to the retained earnings balance at the
beginning of the period in which the adjustment was made.
44. The amount of a corporation’s retained earnings that has been restricted/appropriated should be reported in
the notes to the financial statements.
45. A restriction/appropriation of retained earnings establishes cash assets that are set aside for a specific
purpose.
46. A 10% stock dividend will increase the number of shares outstanding but the book value per share will
decrease.
47. The cost method of accounting for the purchase and sale of treasury stock is a commonly used method.
48. Under the cost method, when treasury stock is purchased by the corporation, the par value and the price at
which the stock was originally issued are important.
49. If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of
income is reported in the income statement.
50. A sale of treasury stock may result in a decrease in paid-in-capital. All decreases should be charged to the
Paid-In-Capital from Sale of Treasury account.
51. Treasury Stock is listed in the stockholders’ equity section on the balance sheet.
52. The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total
stockholders’ equity.
53. The retained earnings statement may be combined with the income statement.
54. If paid-in-capital in excess of par/preferred stock is $30,000, preferred stock is $200,000, paid-in-capital in
excess of par/common stock is $20,000, common stock is $525,000, and retained earnings is $105,000 (deficit),
the total stockholders’ equity is $880,000.
55. A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 5-for-1
stock split, the number of shares outstanding after the split will be 40,000.
56. The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage
more investors to enter the market for the company’s shares.
57. The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate
number of additional shares, is called a stock split.
58. A corporation has 12,000 shares of $20 par value stock outstanding that has a current market value of
$150. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately
$50.
59. A stock split results in a transfer at market value from retained earnings to paid-in capital.
60. If a company has preferred stock, the preferred stock dividend is added to net income when computing
earnings per common share.
61. Which of the following is not characteristic of a corporation?
62. Characteristics of a corporation include
63. One of the main disadvantages of the corporate form is the
64. A disadvantage of the corporate form of business entity is
65. Under the corporate form of business organization
66. Those most responsible for the major policy decisions of a corporation are the
67. Which one of the following would not be considered an advantage of the corporate form of organization?
68. Which of the following is not true of a corporation?
69. The ability of a corporation to obtain capital is
70. Which of the following statements concerning taxation is accurate?
71. The term deficit is used to refer to a debit balance in which of the following accounts of a corporation?
72. Stockholders’ equity
73. The state charter allows a corporation to issue only a certain number of shares of each class of stock. This
amount of stock is called
74. Which of the following is not a right possessed by common stockholders of a corporation?
75. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that
40,000 shares were originally issued and 10,000 were subsequently reacquired. What is the number of shares
outstanding?
76. The par value per share of common stock represents
77. A corporation issues 2,500 shares of common stock for $ 45,000. The stock has a stated value of $10 per
share. The journal entry to record the stock issuance would include a credit to Common Stock for
78. The excess of issue price over par of common stock is termed a(n)
79. The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in payment of
legal fees for organizing the corporation includes a credit to
80. The price at which a stock can be sold depends upon a number of factors. Which statement below is not
one of those factors?
81. The entry to record the issuance of common stock at a price above par includes a debit to
82. Merritt Company acquired a building valued at $210,000 for property tax purposes in exchange for 12,000
shares of its $5 par common stock. The stock is widely traded and selling for $18 per share. At what amount
should the building be recorded by Merritt Company?
83. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that
30,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares
outstanding?
84. Par value
85. The authorized stock of a corporation
86. If Everly Company issues 1,000 shares of $5 par value common stock for $75,000, the account
87. If common stock is issued for an amount greater than par value, the excess should be credited to
88. The Sneed Corporation issues 10,000 shares of $50 par value preferred stock for cash at $75 per share. The
entry to record the transaction will consist of a debit to Cash for $750,000 and a credit or credits to
89. Alma Corp. issues 1,000 shares of $10 par value common stock at $14 per share. When the transaction is
recorded, credits are made to:
90. Nexis Corp. issues 1,000 shares of $15 par value common stock at $22 per share. When the transaction is
recorded, credits are made to:
91. When Bayou Corporation was formed on January 1, 20xx, the corporate charter provided for 100,000 share
of $10 par value common stock. The following transaction was among those engaged in by the corporation
during its first month of operation: The corporation issued 9,000 shares of stock at a price of $23 per share.
The entry to record the above transaction would include a
92. On January 1, 20xx, Swenson Corporation had 40,000 shares of $10 par value common stock issued and
outstanding. All 40,000 shares had been issued in a prior period at $20.00 per share. On February 1, 20xx,
Swenson purchased 4,000 shares of treasury stock for $24 per share and later sold the treasury shares for $21
per share on March 1, 20xx.
The journal entry to record the purchase of the treasury shares on February 1, 20xx, would include a
93. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that
60,000 shares were originally issued and 10,000 were subsequently reacquired. What is the amount of cash
dividends to be paid if a $2 per share dividend is declared?
94. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that
45,000 shares were originally issued and 5,000 were subsequently reacquired. What is the amount of cash
dividends to be paid if a $2 per share dividend is declared?
95. The date on which a cash dividend becomes a binding legal obligation is on the
96. The cumulative effect of the declaration and payment of a cash dividend on a company’s financial
statements is to
97. Which of the following is the appropriate general journal entry to record the declaration of a cash
dividends?
98. Miriah Inc. has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par
value common stock outstanding at December 31, 2014. What is the annual dividend on the preferred stock?
99. Which of the following is not a prerequisite to paying a cash dividend?
100. The liability for a dividend is recorded on which of the following dates?
101. When a stock dividend is declared, which of the following accounts is credited?
102. Treasury stock shares are
103. Which statement below is not a reason for a corporation to buy back its own stock.
104. How is treasury stock shown on the balance sheet?
105. The excess of sales price of treasury stock over its cost should be credited to
106. What is the total stockholders’ equity based on the following account balances?
Common Stock
Paid-In Capital in Excess of Par
Retained Earnings
Treasury Stock
107. Treasury stock which was purchased for $3,000 is sold for $3,500. As a result of these two transactions
combined
108. Treasury stock that had been purchased for $5,600 last month was reissued this month for $8,500. The
journal entry to record the reissuance would include a credit to
109. A corporation purchased 1,000 shares of its $5 par common stock at $10 and subsequently sold 500 of the
shares at $20. What is the amount of revenue realized from the sale?
110. A corporation purchases 10,000 shares of its own $10 par common stock for $35 per share, recording it at
cost. What will be the effect on total stockholders’ equity?
111. In which section of the financial statements would Paid-In Capital from Sale of Treasury Stock be
reported?
112. Which of the following is not classified as paid-in capital on the balance sheet?
113. All of the following are normally found in a corporation’s stockholders’ equity section except
114. Which of the following amounts should be disclosed in the stockholders’ equity section of the balance
sheet?
115. Significant changes in stockholders’ equity are reported in
116. Retained earnings
117. Which of the following would appear as a prior-period adjustment?
118. A restriction/appropriation of retained earnings
119. The Dayton Corporation began the current year with a retained earnings balance of $32,000. During the
year, the company corrected an error made in the prior year, which was a failure to record depreciation expense
of $3,000 on equipment. Also, during the current year, the company earned net income of $12,000 and
declared cash dividends of $7,000. Compute the year end retained earnings balance.
120. What is the total stockholders’ equity based on the following data?
Common Stock
$630,000
Excess of Issue Price Over Par
375,000
Retained Earnings (deficit)
(65,000)
121. Treasury stock should be reported in the financial statements of a corporation as a(n)
122. The reduction of par or stated value of stock by issuance of a proportionate number of additional shares is
termed a
123. A corporation has 50,000 shares of $25 par value stock outstanding. If the corporation issues a 3-for-1
stock split, the number of shares outstanding after the split will be
124. When a corporation completes a 3-for-1 stock split
125. A corporation has 50,000 shares of $28 par value stock outstanding that has a current market value of
$150. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately
126. The primary purpose of a stock split is to
127. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at
$8. Subsequently, the company declared a 2% stock dividend on a date when the market price was $11 a
share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result
of the stock dividend?
128. A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at
$9. Subsequently, the company declared a 2% stock dividend on a date when the market price was $10 a
share. The effect of the declaration and issuance of the stock dividend is to
129. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at
$8. Subsequently, the company declared a 4% stock dividend on a date when the market price was $12 a
share. What is the amount transferred from the Retained Earnings account to Paid-in Capital accounts as a
result of the stock dividend?
130. Which of the following statements is not true about a 2-for-1 split?
131. A corporation has 50,000 shares of $25 par value stock outstanding that has a current market value of
$150. If the corporation issues a 5-for-1 stock split, the market value of the stock after the split will be
approximately: