Financial Accounting: IFRS, 11e, GE
Harrison/Horngren/Thomas/Tietz/Suwardy
Test Item File
Chapter 10: Shareholders’ Equity
10.1-1 A corporation is a separate legal entity that exists apart from its owners.
10.1-2 The most that a shareholder can lose on an investment in a corporation is the amount paid for the shares.
10.1-3 Double taxation means that corporate earnings are taxed at the corporate level and a second time
when distributed to the shareholders as dividends.
10.1-4 Shareholders have unlimited liability, since there is no personal obligation of a shareholder for
the debts of the corporation.
10.1-5 Corporations have continuous lives regardless of changes in their ownership.
10.1-6 Partnerships have the ability to raise more capital than corporations.
10.1-7 Since owners of a corporation have limited liability, a corporation is always the best way to
organize a new business.
10.1-8 Management’s goal is to maximize the firm’s value for the shareholders.
10.1-9 In a corporation, the ownership is separate from the management.
10.1-10 The shareholders’ ownership interest in the assets of the corporation is shareholders’
equity.
10.1-11 Corporations have continuous lives regardless of changes in their ownership.
10.1-12 The amount of shares the corporation can issue under its constitution is called authorized
shares.
10.1-13 Preference shares appear on the balance sheet of every corporation that sells shares to the public.
10.1-14 One unique advantage given to ordinary shareholders over preference shareholders is the
right to the company’s assets if the company is dissolved.
10.1-15 The account “Share capital” appears on the balance sheet with other paid-in capital
accounts.
10.1-16 Paid-in capital, as shown on a corporate balance sheet, includes the shares accounts and
any additional paid-in capital.
10.1-17 Legal capital is an arbitrary amount assigned by a company to a share.
10.1-18 Preference shares are a hybrid between ordinary shares and long-term debt.
10.1-19 Preference shareholders stand to benefit the most if the corporation succeeds because they take
the most risk by investing in preference shares.
10.1-20 All corporations have ordinary shares, but few have preference shares.
10.1-21 No-par shares does not have a par value, but can have a stated value, which makes it similar to
par value shares.
10.1-22 Which of the following is NOT an advantage of forming a corporation as compared to organizing
as a partnership or proprietorship?
A) Ease of transferring ownership
B) Limited taxation
C) Limited liability of shareholders
D) Corporation is separate legal entity distinct from its owners
10.1-23 Which of the following is NOT a characteristic that distinguishes corporations from
proprietorships and partnerships?
A) Corporations have continuous lives regardless of changes in ownership.
B) Corporations have mutual agency.
C) Corporations are separate legal entities apart from the owners.
D) Corporate earnings are subject to double taxation.
10.1-24 Double taxation means that the:
A) corporation pays tax on its earnings and the shareholders pay tax on dividends.
B) corporation pays income tax and unemployment taxes.
C) earnings of a corporation are subject to state and federal income taxes.
D) shareholders tax rate is twice the amount of the corporate tax rate.
10.1-25 Since a corporation is a separate legal entity:
A) it exists apart from its owners.
B) it has many of the same rights as individuals have.
C) it must be formed under state law.
D) all of the above apply.
10.1-26 A corporation:
A) cannot own property.
B) is managed by the shareholders.
C) has owners who have mutual agency.
D) has owners who have limited liability
10.1-27 Limited liability of a corporation means that:
A) shareholders are not responsible for the decisions of management.
B) the corporation is not required to earn net income.
C) the corporation is not required to pay dividends.
D) a shareholders’ potential loss is limited to their investment in the corporation.
10.1-28 Which of the following types of business organizations terminates when its ownership
structure changes?
A) Proprietorships only
B) Proprietorships and corporations
C) Partnerships and proprietorships
D) Partnerships and corporations
10.1-29 Which of the following is a disadvantage of the corporate form of business organization?
A) Governmental regulation at both the federal and state levels
B) Difficulty in transferring ownership
C) Unlimited liability
D) Mutual agency
10.1-30 The ______________ own the corporation, but the _________________, who are elected
by the shareholders appoint officers to manage the business.
A) shareholders, officers
B) shareholders, board of directors
C) officers, board of directors
D) board of directors, officers
10.1-31 The group elected by the shareholders to set policy for a corporation and to appoint its
officers is the:
A) incorporators.
B) directors.
C) board of directors.
D) audit committee.
10.1-32 A corporation is formed when the incorporators obtain:
A) a charter from the state.
B) a board of directors.
C) shares.
D) officers.
10.1-33 The constitution for governing a corporation is its:
A) charter.
B) bylaws.
C) shareholders.
D) articles of incorporation.
10.1-34 The chairperson of the board of directors has the title of:
A) President.
B) Chief Executive Officer (CEO).
C) Chief Financial Officer (CFO).
D) Chief Operating Officer (COO).
10.1-35 The basic unit of ownership for a corporation is:
A) capital.
B) dividends.
C) shares.
D) retained earnings.
10.1-36 Shareholder rights may include:
A) the right to an equal share of dividends.
B) the right to vote for managers of the corporation.
C) the right to proportionate share of assets in the event of a liquidation.
D) all of the above.
10.1-37 The right to maintain one’s proportionate ownership in the corporation is called the:
A) voting right.
B) liquidation right.
C) preemptive right.
D) dividend right.
10.1-38 Shareholders’ equity is divided into:
A) retained earnings and ordinary shares.
B) retained earnings and preference shares.
C) retained earnings and paid-in-capital.
D) ordinary shares and preference shares.
10.1-39 The number of shares outstanding is the same as the number of shares that is:
A) issued to the shareholders.
B) authorized by the board of directors.
C) currently in the hands of the shareholders.
D) ready to be sold to shareholders.
10.1-40 Contributed capital is also known as:
A) ordinary shareholders’ equity.
B) paid-in capital.
C) retained earnings.
D) total shareholders’ equity.
10.1-41 Paid-in capital is the amount of shareholders’ equity that the:
A) corporation has earned through profitable operations.
B) shareholders have contributed to the corporation, less the preference shares.
C) shareholders have contributed to the corporation, less the amount of shareholders’ equity that
the corporation has given back to the shareholders.
D) shareholders have contributed to the corporation.
10.1-42 Legal capital is the:
A) amount owed to owners.
B) amount owed to creditors.
C) par value of authorized shares.
D) par value of shares issued.
10.1-43 The amount of shareholders’ equity that the corporation has earned through profitable
operation of the business and has not given back to shareholders is:
A) outstanding shares.
B) legal capital.
C) treasury shares.
D) retained earnings.
10.1-44 If a corporation issues only one class of shares, it must be:
A) contributed.
B) ordinary.
C) preference
D) par value.
10.1-45 Preference shareholders:
A) receive dividends before ordinary shareholders.
B) receive assets upon liquidation before ordinary shareholders.
C) have basic shareholders’ rights unless a right is specifically denied.
D) have all of the above.
10.1-46 Dividends are declared by the:
A) shareholders.
B) CEO.
C) board of directors.
D) CFO.
10.1-47 Which statement is TRUE regarding preference shares?
A) The dividends paid on preference shares are deductible on the corporation’s tax return.
B) The company has an obligation to repay the preference shares.
C) The obligation to pay dividends occurs only after the board of directors declares the dividends.
D) All of the above are true.
10.1-48 The arbitrary amount assigned by a company to a share is the:
A) par value.
B) capital value.
C) no-par value.
D) total value.
10.2-1 A corporation will often utilize the services of an underwriter to sell its shares.
10.2-2 Most companies set par value high and issue ordinary shares for a price below par value.
10.2-3 The entry to sell 100 shares of $1 par value ordinary shares at $5 per share would include a credit
to Paid-in Capital in Excess of Par-Ordinary for $400.
10.2-4 A Gain on Issue of Ordinary shares indicates that the shares were sold for more than its par value.
10.2-5 Because a company is dealing with its own shareholders, issuance of shares is not a gain or
income to the company.
10.2-6 Assets other than cash should be recorded at their current fair market value when received from
the issuance of shares.
10.2-7 Companies that have true no-par shares have no additional paid-in capital account.
10.2-8 Another name for paid-in capital in excess of par is additional paid-in capital.
10.2-9 When one shareholder sells his shares to another shareholder, the corporation’s equity will
increase.
10.2-10 When a company sells its shares for an asset other than cash, the asset’s prior book value is used
to record the value of the shares.
10..2-11 When a company sells it shares for an asset other than cash, the value of the asset can create an
ethical challenge.
10.2-12 The accounting for preference shares is the same as the accounting for ordinary shares.
10.2-13 Convertible preference shares are always convertible at the discretion of the corporation.
10.2-14 The price that the shareholder pays to acquire shares from the corporation is the:
A) authorized price.
B) issue price.
C) par price.
D) stated price.
110.2-15 Assets received in exchange for the issuance of shares should be recorded at:
A) book value of the asset exchanged.
B) fair market value, as determined by a good-faith estimate from independent appraisers.
C) historical cost.
D) historical cost less accumulated depreciation taken to date.
10.2-16 When a company issues shares at a price above its par value:
A) assets decrease and equity increases.
B) assets increase and equity decreases.
C) assets and equity increase by the same amount.
D) assets and equity increase by different amounts.
10.2-17 How does an investment of cash in a corporation affect the corporation’s balance sheet?
A) It increases assets and decreases shareholders’ equity.
B) It increases assets and increases shareholders’ equity.
C) It increases assets and increases liabilities.
D) It increases assets and decreases liabilities.
10.2-18 The difference between the issue price of the shares and the par value of the shares is:
A) par value.
B) market value.
C) treasury shares.
D) additional paid-in capital.
10.2-19 Accounting for no-par ordinary shares with a stated value is identical to accounting for:
A) par value shares
B) no-par value shares.
C) treasury shares.
D) preference shares.
10.2-20 Both the par value of the shares and the additional paid-in capital are part of:
A) retained earnings.
B) legal capital.
C) paid-in capital.
D) stated value.
10.2-21 The entry to record ordinary shares issued at its par value includes a:
A) debit to the Ordinary shares account.
B) debit to Retained Earnings.
C) credit to the Ordinary shares account.
D) credit to Retained Earnings.
10.2-22 When a company issues it shares, it:
A) can recognize a gain, but not a loss.
B) can recognize a loss, but not a gain.
C) cannot recognize a gain or a loss.
D) can recognize a gain or a loss.
10.2-23 When 100 shares of $10 par value Ordinary shares are issued at $53 per share, Paid-in
Capital in Excess of Par value–Ordinary will:
A) increase $1,000.
B) increase $4,300.
C) increase $5,300.
D) not be affected.
10.2-24 Golden Eagle Corporation issues 100 shares of $10 par value ordinary shares for $50 per
share. This transaction will include a credit to Ordinary shares for:
A) $1,000 and a Gain on Issue of Ordinary shares for $4,000.
B) $1,000 and a credit to Retained Earnings for $4,000.
C) $1,000 and a credit to Paid-in Capital in Excess of Par for $4,000.
D) $5,000.
10.2-25 Hawkeye Corporation issues 100 shares of no-par value ordinary shares for $20 per share. This
transaction will include a credit to Ordinary shares for:
A) $1,000 and a Gain on Issue of Ordinary shares for $1,000.
B) $1,000 and a credit to Retained Earnings for $1,000.
C) $1,000 and a credit to Paid-in Capital for $1,000.
D) $2,000 and no entry to Paid-in Capital in Excess of Par or Stated Value.