978-0134125053 Chapter 10 Part 1

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Financial Accounting, 4e (Kemp)

Chapter 10 Corporations: Paid-In Capital and Retained Earnings

10.1 Review the characteristics of a corporation

1) Capital stock represents the number of shares of stock a corporation is authorized by a state to

sell.

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2) Outstanding stock of a corporation represents 100% of its ownership.

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3) A corporation is a separate legal entity from its owners.

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4) A corporate charter describes the purpose, place of business, and other details of the business

being incorporated.

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5) A corporation must incorporate in every state in which it does business.

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6) Limited liability means that the stockholders of a corporation share a personal liability for all

debts of the corporation.

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7) Changes in ownership through transfer of shares of stock have no effect on the life of a

corporation.

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8) Corporations are the most numerous form of business activity.

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9) The first step in becoming a corporation is to file a(n) _______ with the state government.

A) business plan

B) bank statement

C) corporate charter

D) list of board members

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10) The number of shares of stock that a corporation is given the right to sell is called:

A) issued stock.

B) authorized stock.

C) outstanding stock.

D) capital stock.

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11) The basic unit of stock is called a(n):

A) authorization.

B) certificate.

C) share.

D) ownership record.

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12) Stockholders will be issued ________ physically or electronically.

A) charters

B) articles of incorporation

C) authorized stock

D) stock certificates

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13) Stock that is held by stockholders is called:

A) issued stock.

B) authorized stock.

C) outstanding stock.

D) open stock.

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14) Authorized capital stock are those shares:

A) listed in the charter.

B) issued to the corporation’s officers.

C) sold and in stockholder possession.

D) that pay dividends.

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15) Which of the following business types is largest by number?

A) Not-for-profits

B) Proprietorships and partnerships

C) Corporations

D) Government entities

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16) Which of the following business types dominates by the amount of business transacted?

A) Partnerships

B) Proprietorships

C) Corporations

D) Government entities

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17) Which of the following is NOT an advantage of a corporation?

A) Unlimited liability

B) Ease of raising capital

C) Ease of transfer ownership

D) Continuous life

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18) Which of the following is an advantage of a corporation?

A) Tax regulations

B) Continuous life

C) Unlimited liability

D) All of the above are advantages

19) One disadvantage to the corporate form of organization is:

A) government regulations.

B) limited liability.

C) transfer of ownership policies.

D) ability to raise capital.

Question Type: Concept

20) Which of the following are considered to be legal entities that exist separate and distinct

from their owners?

A) Sole proprietorships

B) Partnerships

C) Corporations

D) Organizations with more than 100 partners

Answer: C

Diff: 1

Question Type: Concept

10.2 Describe the two sources ofstockholders‘ equity and the different classes of stock

1) Carol owns 3% of the total shares in a company; if the company issues a dividend she will

receive 3% of the dividend.

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2) Stockholders‘ Equity consists of contributed capital and paid-in capital.

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3) Retained Earnings represent internally generated capital.

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4) For most companies, preemptive rights are the exception, rather than the rule.

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5) Preferred stock is considered a voting “class” of stock.

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6) One of the ways a stockholder can help manage a corporation is through their right to vote.

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7) If a stock has a stated value of $1, this means that the stock sells for $1 per share.

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8) Preferred stockholders generally have the same basic rights as common stockholders EXCEPT

for:

A) voting.

B) dividends.

C) liquidation.

D) preemption.

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9) Which of the following stockholder rights is the one that allows a stockholder to participate in

the management of a corporation?

A) Vote

B) Dividends

C) Liquidation

D) Preemption

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10) Maintaining their proportionate share in the ownership of a corporation when new stock is

available to be purchased is an example of which stockholder right?

A) Vote

B) Dividends

C) Liquidation

D) Preemption

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11) Stockholders receiving their proportionate share of any assets left after a company goes out

of business is an example of which stockholder right?

A) Vote

B) Dividends

C) Liquidation

D) Preemption

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12) Earnings that a stockholder receives from a corporation is an example of which stockholder

right?

A) Vote

B) Dividends

C) Liquidation

D) Preemption

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13) If you own 700 shares (2% of a corporation’s stock) and the corporation issues 19,000 new

shares, how many of the new shares can you purchase under preemptive right?

A) 686

B) 380

C) 1,080

D) 0

Question Type: Application

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14) If you own 700 shares (5% of a corporation’s stock) and the corporation issues 17,000 new

shares, how many total shares will you have after exercising your preemptive rights?

A) 665

B) 850

C) 1,550

D) 0

Question Type: Application

15) If you own 1,100 shares (7% of a corporation‘s stock) and the corporation issues 14,000 new

shares, how many of the new shares can your purchase under preemptive right?

A) 0

B) 980

C) 1,023

D) 2,080

Question Type: Application

16) If you own 1,200 shares (3% of a corporation‘s stock) and the corporation issues 11,000 new

shares, how many total shares will you have after exercising your preemptive right?

A) 0

B) 330

C) 1,164

D) 1,530

Question Type: Application

17) At least one “class” of stock MUST have:

A) preemptive rights.

B) dividend rights.

C) liquidation rights.

D) voting rights.

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18) Which right do preferred stockholders receive before common stockholders?

A) Selling rights

B) Dividend rights

C) Voting rights

D) Preemptive rights

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19) Which is NOT a value placed on a certificate for a share of the company’s stock?

A) Par

B) Stated value

C) No par

D) Market value

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20) Values such as par, stated value, and no-par are assigned based upon:

A) federal regulation.

B) choice of the organizers of the corporation.

C) tax law.

D) market values of the stock.

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21) Stated value is assigned:

A) when the corporate charter is filed.

B) when the company decides to issue the stock.

C) after the stock has been issued.

D) at the first meeting of the organizers of the corporation.

Question Type: Concept

22) Par value is assigned.

A) when the corporate charter is filed.

B) when the company decides to issue the stock.

C) after the stock has been issued.

D) at the first meeting of the organizers of the corporation.

Question Type: Concept

23) If there is only one class of stock outstanding, such stock would be classified as:

A) authorized stock.

B) common stock.

C) preferred stock.

D) issued stock.

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24) Stockholders‘ Equity consists of:

A) contributed capital and paid-in capital.

B) common stock and preferred stock.

C) paid-in capital and Retained Earnings.

D) legal capital and paid in capital.

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10.3 Journalize the issuance of stock

1) Many companies raise capital by issuing stock directly to stockholders or by using an

underwriter.

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2) The issue price of the stock usually is equal to the par value of the stock.

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3) A company can have a profit or loss when buying or selling its own stock.

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4) When stock is sold, the total paid-in capital should equal the amount of cash received.

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5) A corporation may issue stock for assets other than cash, requiring the recording of the assets

at fair market value.

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6) A company issues 20,000 shares of its $28 par common stock for $32 per share. The entry to

record this will include a debit to Cash for $560,000.

Question Type: Application

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7) A company issues 25,000 shares of its $25 par common stock for $27 per share. The entry to

record this will include a debit to Cash for $675,000.

Question Type: Application

8) The type of stock that does NOT carry paid–in capital in excess of par is called:

A) par stock.

B) no-par stock.

C) stated value stock.

D) outstanding stock.

Question Type: Concept

9) The formula needed to compute “additional paid–in capital in excess of par” is:

A) number of shares of stock times par value per share of stock.

B) number of shares of stock times selling price per share of stock.

C) number of shares of stock times (selling price per share – par value per share).

D) number of shares of stock times (selling price per share + par value per share).

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10) Accounting for stock at a stated value is almost identical to recording:

A) outstanding stock.

B) no-par stock.

C) issued stock.

D) par stock.

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11) The initial selling price for a share of stock is called the:

A) stated value

B) par value

C) issue price

D) list price

Question Type: Concept