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Chapter 11 Stockholders' Equity: Paid-In Capital Answer Key
True / False Questions
1.
A corporation is a legal entity separate from its owners; it may sue and be sued, but it may
not own property in its own name.
2.
A corporation continues in existence even if a stockholder dies or withdraws from the
organization.
3.
Stockholders of a corporation are personally liable for the debts of the corporation if all
shares of stock are owned by the officers of the corporation.
4.
It is illegal for the government to double tax corporate earnings.
5.
Stockholders in a corporation elect the board of directors, pass the bylaws of the
corporation, and hire top corporate officers and managers.
6.
The costs to organize a corporation (organization costs) are reported as an intangible
asset in the balance sheet and amortized to expense over the 5-year life used by the IRS.
7.
When a stockholder sends in a proxy statement to a corporation he or she owns stock in,
they grant management the voting rights associated with their shares.
8.
A stockholders' subsidiary ledger will have entries made for each stockholder showing the
number of shares held.
9.
The board of directors is at the top of a corporate organization chart, followed by the
stockholders, then the CEO or president of the corporation.
10.
The number of shares a corporation may issue is specified in the articles of incorporation
and approved by the Securities and Exchange Commission.
11.
The par value of a stock is the minimum amount of capital of the corporation existing for
the protection of creditors.
12.
When a corporation issues capital stock, most state laws require the corporation to credit
Retained Earnings for the par value of shares of stock issued.
13.
The additional paid-in capital account represents profit to the corporation and, as such, it
is credited to Retained Earnings.
14.
When no-par stock is issued, the entire proceeds are credited to Capital Stock and this
amount is viewed as legal capital not subject to withdrawal.
15.
If capital stock is issued by a corporation at a price lower than par value, the difference
represents a loss in the period in which the shares of stock are issued.
16.
When par value capital stock is issued, capital stock is credited with the par value of the
shares issued, regardless of whether the issuance price is equal to par, more than par, or
less than par.
17.
An underwriter is a bank or trust company that maintains a corporation's stockholder
records.
18.
Authorization of a stock issue creates an asset on the books of the issuing corporation.
19.
Preferred stockholders generally do not have the same voting rights as do common
stockholders in a corporation.
20.
When a corporation fails to pay a dividend one year on its common stock, it is said to be
"in arrears."
21.
Cumulative preferred stock means the stock is entitled to its regular dividend plus an
additional share of the total amount of declared dividends.
22.
The payment of cash dividends to common stockholders is classified as a financing
activity on the statement of cash flows whereas payment of a cash dividend to preferred
stockholders is classified as an investing activity.
23.
Book value per share of preferred stock is computed as total stockholders' equity less the
amount assigned to common stock plus any dividends in arrears divided by the number of
shares of preferred stock outstanding.
24.
In the Stockholders' Equity section of a balance sheet, par value of common stock is
presented first, followed by par value of preferred stock, followed by additional paid-in
capital on common stock, followed by additional paid-in capital on preferred stock.
25.
International accounting standards require mandatory redeemable preferred stock to be
classified as a liability on the balance sheet and not as equity.
26.
To be consistent with international standards, the FASB has changed reporting
requirements for redeemable preferred stock to require it to be reported in the equity
section.
27.
A corporation must always have more than one class of stock.
28.
Interest rates impact the market value of common stock more than they impact the market
value of preferred stock.
29.
The most important factor affecting the market price of common stock is the stated
dividend rate.
30.
The relationship between book value and market price of capital stock is a measure of
investors' confidence in a company's management.
31.
A stock split will normally increase the market price of the stock and decrease the number
of shares on the market.
32.
A stock split will decrease the par value per share of the stock.
33.
Treasury stock is stock that is issued and outstanding but not authorized.
34.
The purchase of treasury stock creates an asset for the corporation and is recorded at the
cost of the shares purchased.
35.
Treasury stock is stock of a corporation that has been issued and then reacquired and
then cancelled.
36.
The purchase of treasury stock for cash causes no change in total assets.
37.
The sale of treasury stock at a price in excess of its cost results in a realized gain which
should be presented as a non-operating item in the income statement.
Multiple Choice Questions
38.
The advantages of corporations going public include all of the following
except
:
39.
Which of the following is
not
a characteristic of the corporate form of organization?
40.
A primary disadvantage of the corporate form of organization is:
41.
Public corporations are required by law or regulation to perform all of the following
except
:
42.
Which of the following apply to closely held corporations?
Topic: Corporations
43.
In a corporation's organization chart, who has/have the highest position?
44.
The ownership of common stock in a corporation usually carries the following rights:
45.
The board of directors' primary functions include all of the following
except
:
46.
Which of the following is
not
a right of stockholders?
47.
The rights of a common stockholder do
not
include the right:
48.
The directors of a corporation:
