Appendix C Forms of Business Organization Answer Key
True / False Questions
1.
Limited personal liability is a characteristic of a sole proprietorship.
2.
The ability of a sole proprietorship to pay its debts may be determined by the financial
strength of the owner.
3.
The assets of a partnership belong jointly to all the partners while the assets of a sole
proprietorship belong to the proprietorship.
4.
A partnership has a limited life and each partner has unlimited personal liability.
5.
Mutual agency refers to the ability of each partner to withdraw cash and other assets at
will.
6.
In a limited liability partnership, a partner has unlimited liability for his own actions and
limited liability for the actions of his partners.
7.
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.
8.
A corporation is a legal entity that may enter into contracts, may sue or be sued, and is
responsible for its own debts.
9.
Every stockholder in a corporation will have a drawing account that will be closed to
retained earnings during the closing process.
10.
A corporation, as well as a partnership, must file a corporate income tax return and pay tax
on its earnings.
11.
Stockholders of an S corporation pay taxes on their share of the corporate net income
whether they receive it or not.
12.
Retained earnings are a fund of cash the business has earned from profitable operations.
13.
The adjusting entry to record income taxes in an unprofitable period would debit Income
Tax Payable and credit Income Tax Expense.
14.
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.
15.
The entry to record the issuance of 100 shares of capital stock in exchange for $1,000 cash
includes a debit to Capital Stock.
16.
When closing Income Summary, assuming the corporation had net income for the
accounting period, the account Retained Earnings is credited.
17.
Closely held corporations have the same ability to qualify for credit sources as publicly
traded corporations.
18.
Shareholders report and pay income tax on dividends received from a corporation.
19.
Personal liability of the owners for any business debts is an important consideration when
selecting an appropriate form of business organization.
20.
When a sole proprietorship incorporates, the assets of the new business are recorded at
cost.
21.
Regardless of whether partners in a partnership work in the company, each partner is
allocated an equal share of profits.
Multiple Choice Questions
22.
The net income of a sole proprietorship should compensate the owner for all of the
following except:
23.
Which of the following is a characteristic of a corporation?
24.
The adjusting entry to recognize income taxes due on a profit of $100,000 and a tax rate of
40% is:
25.
Retained Earnings represent:
26.
The journal entry when a dividend is declared for $150,000 would be:
Topic: Business Organizations
27.
Topic: Business Organizations
Double Taxation means:
28.
In a sole proprietorship the balance in the Income Summary account is closed to:
Topic: Business Organizations
29.
Assets contributed to a partnership by a partner would be recorded at:
30.
Salary allowances to partners when dividing net income:
31.
Which of the following is a characteristic of a corporation?
32.
Net income in a partnership may not be distributed to the partners:
33.
In order to form a corporation, the corporation must obtain a charter from:
34.
The Board of Directors of a corporation: