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Chapter 13
ACCOUNTING FOR CORPORATIONS
True /False Questions
1. A corporation is a legal entity separate from its owners.
2. Corporations are subject to substantially fewer regulations and laws than are
proprietorships and partnerships.
3. Organization expenses of a corporation often include legal fees and promoter fees.
4. The only way that a shareholder can affect the management of a corporation is to get
elected to the corporation’s board of directors.
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5. A proxy is a document that gives a designated agent the right to vote a shareholder’s stock.
6. Common shareholders always share equally with all other shareholders in all dividends.
7. A preemptive right means shareholders can purchase their proportional share of common
stock issued later by the corporation.
8. Stock is attractive to investors because stockholders are not liable for the corporation’s
actions and debts and because stock is easily transferred.
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9. A transfer agent keeps stockholder records and prepares official lists of stockholders and
dividend payments.
10. Stockholders’ equity consists of paid-in capital and retained earnings.
11. Par value per share is the price at which a share of stock is bought or sold.
12. Paid-in capital is the total amount of cash and other assets the corporation receives from
its stockholders in exchange for its stock.
13. Authorized stock is the total number of shares outstanding.
14. If a corporation is authorized to issue 1,000 shares of $50 common stock, it is said to have
$50,000 of stock outstanding.
15. Minimum legal capital requirements are intended to protect creditors by requiring a
minimum level of legal minimum.
16. Stated value stock is par stock that is assigned a value per share by the corporation’s board
of directors.
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17. A corporation can issue two kinds of stock – common and preferred.
18. Common stock always carries a preference for receiving dividends over preferred stock.
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. Special rights often granted to preferred stock include a preference for receiving dividends
and for the distribution of assets if the corporation is liquidated.
20. Cumulative preferred stock carries the right to be paid both current and all prior periods’
unpaid dividends before any dividends are paid to common shareholders.
21. Retained earnings generally consist of a company’s cumulative net income less any net
losses and dividends declared since its inception.
22. Retained earnings are not part of the stockholders’ claims on the company’s net assets.
23. The term restricted retained earnings refers to both statutory and contractual restrictions.
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24. A common statutory restriction is reported on the income statement whereas; a common
contractual restriction is reported in the stockholders’ equity section of the balance sheet.
25. If the dividends account is not recorded as a reduction to Retained Earnings on the date of
declaration, the dividends account is closed to Retained Earnings at the end of the accounting
period.
26. A company made an error in recording the 2009 purchase of computer equipment as an
expense. This was discovered in 2011. The item should be reported as a prior period
adjustment on the 2009 income statement.
27. Changes in accounting estimates are accounted for in current and future periods.
28. Earnings per share is the amount of income earned per share of a company’s outstanding
(weighted-average) common stock.
29. Sparrow Company had net income of $63,000. The company had 9,000 weighted average
common shares outstanding. The basic earnings per share equal $7.00 per share.
30. The price-earnings ratio reveals information about the stock market’s expectations for a
company’s future growth in earnings.
31. Stocks with a price-earnings ratio greater than 20 to 25 are likely to be underpriced.
32. The price-earnings ratio is computed by dividing earnings per share by the market price
per share.
33. A company has earnings per share of $6.45. Its dividend per share is $0.20, and its market
price per share is $80. Its price-earnings ratio equals 12.4.
34. Dividend yield shows the annual amount of cash dividends distributed to common shares
relative to the stock’s market price.
35. Dividend yield is defined as the market price per share of a company’s stock divided by its
earnings per share.
36. Stocks that pay large dividends on a regular basis are growth stocks.
37. Dividend yield is computed by dividing annual cash dividends per share by the market
value per share.
38. Book value per share reflects the value per share if a company is liquidated at balance
sheet amounts.
39. The main limitation in using book value per share for stock valuation models is the
potential difference between recorded value and market value for both assets and liabilities.
40. Book value per common share is calculated by dividing stockholders’ equity applicable to
common shares by the number of common shares outstanding.
41. If a corporation receives assets other than cash in exchange for stock, it records the assets
received at their market value as of the date of the transaction.
42. A corporation sometimes gives shares of its stock to promoters in exchange for their
services in organizing the corporation.
43. When no-par stock is not assigned a stated value, the total amount received is recorded as
Common Stock.
44. The date of record is the date that directors vote to pay a cash dividend to shareholders.
45. A debit balance in retained earnings is referred to as a retained earnings deficit.
46. The declaration of cash dividends reduces retained earnings.
47. The journal entry to record the declaration of dividends on common stock includes a debit
to Retained Earnings and a credit to Common Dividend Payable.
48. A stock split is the distribution of additional shares of stock to stockholders according to
their percent of ownership.
49. A stock dividend reduces a corporation’s assets and its stockholders’ equity.
50. A stock dividend is a distribution of corporate assets that returns part of the original
investment to shareholders.
51. A reverse stock split reduces the market value per share and the par value per share of
stock.
52. Recording of a stock dividend does not result in a liability being recorded.
53. A stock split increases total stockholders’ equity.
54. A large stock dividend only occurs when a distribution of more than 50% of previously
outstanding shares is issued.
55. A stock dividend decreases the market price of the company’s stock.
56. All stock dividends are recorded at par value so there would never be a credit to the paid-
in capital in excess of par value account.
57. Unpaid and undeclared preferred dividends are called dividends in arrears.
58. Cumulative preferred stock has a right to be paid both current and prior periods’ unpaid
dividends before any dividend is paid to common shareholders.
59. Callable preferred stock gives its holders the option of exchanging their preferred shares
into common shares at a specified rate.
60. Participating preferred stock has a feature that allows it to share with common
shareholders in any dividends paid in excess of the percent or dollar amount stated on the
preferred stock.
61. Corporations issue preferred stock to raise capital without sacrificing control of the
corporation and/or to boost the return earned by common shareholders.
62. Treasury stock is stock that has been authorized, issued, and is outstanding.
63. Purchasing treasury stock reduces the corporation’s assets and stockholders’ equity by
equal amounts.
64. If the purchase price of retired stock exceeds the net amount removed from paid-in capital,
the excess is debited to Retained Earnings.
65. Stock that is retired is the same as authorized and unissued stock.
66. If a company resells treasury stock below the acquisition cost, a loss from the sale of
treasury stock is recorded.
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67. The costs of bringing a corporation into existence, including legal fees, promoter fees, and
amounts paid to obtain a charter are called:
A. Minimum legal capital.
B. Stock subscriptions.
C. Organization expenses.
D. Selling expenses.
E. Prepaid fees.
68. The right of common shareholders to protect their proportionate interest in a corporation
by having the first opportunity to buy additional proportionate shares of common stock issued
by the corporation is called a:
A. Preemptive right.
B. Proxy right.
C. Right to call.
D. Financial leverage.
E. Voting right.
69. A proxy is:
A. A document that gives a designated agent of a stockholder the right to vote the stock.
B. A contractual commitment by an investor to purchase unissued shares of stock.
C. An amount of assets defined by state law that stockholders must invest and leave invested
in a corporation.
D. The right of common stockholders to protect their proportionate interests in a corporation
by having the first opportunity to purchase additional shares of common stock issued by the
corporation.
E. An arbitrary amount assigned to no-par stock by the corporation’s board of directors.
70. The board of directors of a corporation:
A. Are elected by the corporate registrar.
B. Are responsible for day-to-day operations of the business.
C. Do not have the power to bind the corporation to contracts, due to lack of mutual agency.
D. May not also be executive officers of the corporation, due to the separate entity principle.
E. Are responsible for and have final authority for managing corporate activities.
71. The number of shares that a corporation’s charter allows it to sell is referred to as:
A. Issued stock.
B. Outstanding stock.
C. Common stock.
D. Preferred stock.
E. Authorized stock.