College Accounting, 14e (Slater)
Chapter 18 Corporations: Organizations and Stock
18.1 Learning Objective 18-1
1) The document granted by the state authorizing the creation of a corporation is known as:
A) the articles of incorporation.
B) the certificate of achievement.
C) the certificate of incorporation.
D) the minutes book.
2) Articles of incorporation contain all of the following except:
A) the purpose of the business.
B) the types of stock to be offered.
C) the name of the president.
D) organizational structure.
3) Characteristics of a corporation include:
A) stockholders having limited liability.
B) direct management by the stockholders.
C) mutual agency.
D) Both A and C are correct.
4) Stockholders:
A) own stock in the corporation.
B) are officers elected to represent the company.
C) establish policies for the company.
D) are a government agency.
5) Officers of the corporation are:
A) appointed by the stockholders.
B) stockholders of the corporation.
C) appointed by the board of directors.
D) None of these answers is correct.
6) Which of the following is a characteristic of a corporation?
A) Ease of raising capital
B) No mutual agency
C) Unlimited life
D) All of the above are correct.
7) A board of directors:
A) are officers elected by the government to represent the company.
B) establish policies for the company.
C) may not include stockholders in the corporation.
D) All of the above are correct.
8) A major disadvantage of a corporation is the:
A) difficulty in transferring ownership.
B) limited life.
C) difficulty in raising capital.
D) double taxation of income to the corporation and of dividends paid to shareholders.
9) With a limited liability corporation, stockholders:
A) are relieved from personal liability for obligations of the corporation.
B) can only lose their investment amount in the business.
C) are personally liable for the obligations of the corporation.
D) Both A and B are correct.
10) An advantage of a corporation would be:
A) limited liability for the shareholders.
B) limited life.
C) double taxation (income of corporation and dividends to shareholders).
D) both A and B are correct.
11) The financial loss that each stockholder in a corporation can incur is limited.
12) The corporation’s charter and the articles of incorporation are available for the public to view.
13) The stockholders of a corporation have mutual agency.
14) When the shares of stock are sold by the stockholder, the sale has an effect on the company’s assets
and liabilities.
15) Stockholders cannot sell or transfer their stock.
16) An advantage of a corporation is ease of raising capital.
17) Double taxation is a disadvantage of a corporation.
18) List and discuss the (a) advantages and (b) disadvantages of the corporation form of business.
18.2 Learning Objective 18-2
1) Paid-in capital represents:
A) the cumulative earnings of the company.
B) the investments of the owners into the company.
C) the undistributed earnings of the company.
D) None of the above
2) The maximum number of shares of capital stock that a corporation can sell is known as:
A) issued capital stock.
B) outstanding capital stock.
C) authorized capital stock.
D) treasury capital stock.
3) The two major components of the Stockholders’ Equity section of the balance sheet are:
A) Paid-in Capital and Retained Earnings.
B) Stock and Retained Earnings.
C) Stock and Paid-in Capital.
D) Authorized Stock and Preferred Stock.
4) What is a right a preferred stockholder often gives up when purchasing preferred stock?
A) Voting rights
B) Preemptive rights
C) Ability to sell stock
D) A and B are correct.
5) Retained earnings:
A) are the same thing as cash.
B) are not a part of stockholders’ equity.
C) are accumulated profits that are kept in the corporation.
D) represent what stockholders have invested into the corporation.
6) Preemptive rights allow a stockholder to:
A) share in profits first.
B) maintain a proportionate ownership interest in the corporation.
C) vote their shares at the annual meeting.
D) dispose or sell their stock without notice.
7) Which of the following is a characteristic of common stock?
A) The right to share profits by receiving dividends
B) The right to vote
C) The right to sell their stock
D) All of the above are correct.
8) Preferred stockholders have what right over common stockholders?
A) More risk than common stockholders
B) Voting rights
C) Prior claim to dividends
D) Preemptive rights
9) Preferred stock that entitles its holders to any undeclared dividends accumulated before common
stockholders receive dividends is:
A) non-participating.
B) non-cumulative.
C) cumulative.
D) participating.
10) A type of preferred stock that entitles its holders an opportunity to share in additional dividends with
common stockholders is known as:
A) participating.
B) cumulative.
C) non-cumulative.
D) capital.
11) Preferred stock is considered to be non-participating when:
A) preferred stockholders get their yearly dividend and the remainder goes to common stockholders.
B) preferred stockholders have a right to the current year’s dividend, but do not receive holdovers from
past years when dividends were not paid.
C) preferred stockholders have a right to a certain dividend every year.
D) None of these answers is correct.
12) For no-par value stock with a stated value:
A) the stated value is like par value, but it is not printed on stock certificates.
B) Directors cannot change stated value without approval of the state.
C) stated value is the market value.
D) All of the above are correct.
13) Stockholders with a right to current-year dividends but not dividends in arrears are:
A) common stockholders.
B) cumulative preferred stockholders.
C) noncumulative preferred stockholders.
D) None of the above are correct.
14) Par value represents:
A) the market value of the stock.
B) an arbitrary value that is placed on each share of stock.
C) the legal capital of the corporation.
D) Both B and C are correct.
15) Dividends owed to cumulative preferred stockholders that must be paid before common stockholders
can receive their dividends are:
A) common stock.
B) preferred stock.
C) stated value stock.
D) dividends in arrears.
16) Voting rights are a characteristic of which type of stock?
A) Common but not preferred
B) Preferred but not common
C) Both common and preferred
D) Neither common nor preferred
17) No-par value stock with an assigned amount determined by the corporation’s board of directors is:
A) par value.
B) stated value.
C) book value.
D) market value.
18) Preferred stock:
A) is usually a more risky investment than common stock.
B) gives preference to a corporation’s profits and assets.
C) usually maintains voting rights.
D) None of the above are correct.
19) Each share of a corporation’s capital stock gives its owner the right to:
A) vote at stockholders‘ meetings.
B) set company policy.
C) manage the daily operations of the business.
D) determine the amount of dividends to be paid.
20) Noran Corporation has issued 4,800 shares of stock. Emily owns 490 shares. If the corporation issues
an additional 900 shares, how many shares does Emily have the preemptive right to purchase? (Round
intermediary calculations to two decimal places and the final answer to the nearest whole number.)
A) 490 shares
B) 49 shares
C) 90 shares
D) 900 shares
21) Stated value means market value.
22) No-par value is placed on stock certificate when the stock has no-par value and no stated value.
23) When a corporation has only one class of capital stock, it will be common stock.
24) A cumulative preferred stockholder must be paid dividends in arrears before any dividends are paid
to common stockholders.
25) A corporation is required to pay dividends.
26) Shares of outstanding stock may not equal the number of shares of authorized stock.
27) A common shareholder’s right to purchase an equivalent percentage of new stock is his/her
participating right.
28) More stable earnings are a benefit of owning preferred stock.
29) Nonparticipating preferred stock allows stockholders an opportunity to receive a higher percentage of
dividends than promised, before any dividends are paid to common stockholders.
30) The two main sources of stockholders‘ equity are investments by stockholders and net income
retained in the corporation.
31) List and discuss the following:
a. Rights of common stockholders
b. Rights of preferred stockholders
18.3 Learning Objective 18-3
1) If preferred dividends are limited to the stated rate of dividend, the preferred stock is:
A) non-cumulative.
B) cumulative.
C) participating.
D) nonparticipating.
2) The entry to record MidIowa.net selling 1,000 shares of $8.00 par value common stock at $10.00 would
be to:
A) debit Cash $10,000; credit Common Stock $8,000; credit Paid-in Capital in Excess of Par Value–
Common $2,000.
B) debit Cash $10,000; credit Common Stock $10,000.
C) debit Cash $8,000; debit Paid-in Capital in Excess of Par Value-Common $2,000; credit Common Stock
$10,000.
D) None of these answers is correct.
3) The entry to record selling 1,200 shares of no-par common stock with a stated value of $67 for $71
would be to:
A) debit Cash $85,200; credit Common Stock $85,200.
B) debit Cash $80,400; credit Common Stock $80,400.
C) debit Cash $80,400; credit Common Stock $85,200; debit Paid-in Capital in Excess of Par Value-
Common $4,800.
D) debit Cash $85,200; credit Common Stock $80,400; credit Paid–in Capital in Excess of Stated Value–
Common $4,800.
4) Which of the following is NOT one of the procedural steps for calculating dividends with cumulative,
fully participating preferred stock?
A) Calculate the preferred dividends.
B) Calculate the total par value.
C) Calculate common dividends.
D) Calculate treasury stock.
5) Eight hundred shares of $22 par common stock were exchanged for a piece of equipment with a fair
market value of $18,700. The journal entry to record the transaction would include a:
A) credit to Equipment for $17,600.
B) debit to Common Stock for $18,700.
C) credit to Paid-In Capital in Excess of Par Value-Common for $1,100.
D) credit to Common Stock for $18,700.
6) Yellow Corporation has 250 shares of $140, 9% noncumulative nonparticipating preferred stock and
1,470 shares of $8 par value common stock outstanding. The company paid $7,500 cash dividends to
stockholders in the current year. Common stockholders received:
A) $3,150.
B) $6,300.
C) $4,350.
D) $7,500.
7) Organization costs are:
A) part of the company‘s start-up and are listed as expenses.
B) listed as an intangible asset on the balance sheet.
C) a current asset on the balance sheet.
D) a liability on the balance sheet.
8) Yellow Corporation has 270 shares of $100, 9% noncumulative nonparticipating preferred stock and
1,510 shares of $8 par value common stock outstanding. The company paid $7,500 cash dividends to
stockholders in the current year. Preferred stockholders received:
A) $4,860.
B) $5,070.
C) $2,430.
D) $7,500.
9) An intangible asset that records the initial cost of forming the corporation, such as legal and
incorporating fees is called:
A) Common Stock.
B) Organization cost.
C) Preferred Stock.
D) Paid-in Capital.
10) 1,000 shares of $30 par common stock was exchanged for a piece of land with a fair market value of
$30,000. The journal entry to record the transaction would include a:
A) credit to Land for $30,000.
B) credit to Common Stock for $15,000.
C) credit to Paid-In Capital in Excess of Par Value-Common for $15,000.
D) debit to Land for $30,000.
11) RH Corporation Stockholders’ Equity section includes the following information:
Preferred Stock $12,000
Paid-in Capital in Excess of Par Value-Preferred 26,000
Common Stock 21,000
Paid-in Capital in Excess of Par Value-Common 8,000
Retained Earnings 7,000
Total paid-in capital is:
A) $60,000.
B) $67,000.
C) $34,000.
D) $74,000.
12) The Zonga Corporation Stockholders’ Equity section includes the following:
Preferred Stock $30,000
Common Stock 54,000
Paid-in Capital in Excess of Par Value-Preferred 11,000
Paid-in Capital in Excess of Par Value-Common 6,000
Retained Earnings 8,000
Total paid-in capital is:
A) $109,000.
B) $17,000.
C) $93,000.
D) $101,000.
13) The Miranda Corporation Stockholders’ Equity section includes the following:
Preferred Stock $18,000
Common Stock 11,000
Paid-in Capital in Excess of Par Value-Preferred 3,000
Paid-in Capital in Excess of Par Value-Common 9,000
Retained Earnings 16,000
What was the total amount preferred stock was sold for?
A) $15,000
B) $18,000
C) $21,000
D) $34,000
14) The Michigan Stockholders’ Equity section includes the following:
Preferred Stock $4,000
Common Stock 8,000
Paid-in Capital in Excess of Par Value-Preferred 500
Paid-in Capital in Excess of Par Value-Common 1,700
Retained Earnings 6,000
What was the total amount common stock was sold for?
A) $9,700
B) $15,700
C) $14,200
D) $4,500
15) The difference between what stockholders invest and the stated value placed on stock by the board of
directors is called:
A) Paid-in Capital in Excess of Par Value-Common.
B) Paid-in Capital in Excess of Stated Value-Common.
C) Common Stock Stated Value.
D) Preferred Stock.
16) The Blanche Corporation issued 50 shares of $28 par value stock to its accountant. The shares are in
full payment for her $1,600 fee for assistance in setting up the new company. The entry to record the
issuance of the stock would include a:
A) credit to Common Stock for $1,600.
B) debit to Common Stock for $1,600.
C) credit to Common Stock for $1,400.
D) debit to Common Stock for $1,400.
17) The entry to record selling 2,000 shares of no-par common stock with no stated value at $180 per share
would be to:
A) debit Cash $360,000; credit Common Stock $360,000.
B) debit Common Stock $360,000; credit Cash $360,000.
C) debit Cash $340,000; debit Paid-in Capital in Excess of Par Value-Common $20,000; credit Common
Stock $360,000.
D) None of the above are correct.
18) Washington Corporation issued 7,000 shares of its $28 par value common stock for $31 per share. The
entry to record the issuance would include a:
A) credit to Cash for $217,000.
B) credit to Common Stock for $21,000.
C) credit to Common Stock for $196,000.
D) debit to Paid-in Capital in Excess of Par Value-Common for $21,000.
19) The Mars Company issued 150 shares of its $13 par value stock for $21 per share. The entry to record
the receipt of cash and issuance of the stock would include a:
A) debit to Cash of $1,950; credit to Common Stock for $1,950.
B) debit to Cash for $3,150.
C) credit to Common Stock for $3,150.
D) debit to Discount on Common Stock for $1,200.
20) Luxury Motors issued 510 shares of its $8 common stock in exchange for equipment with a fair
market value of $8,200. The entry to record the transaction would include a:
A) debit to Equipment for $4,080.
B) credit to Common Stock for $4,080.
C) debit to Paid-in Capital in Excess of Par Value-Common for $4,120.
D) credit to Common Stock Subscribed for $4,080.
21) Dolly’s Best issued 200 shares of its $6 common stock in exchange for used packaging equipment with
a fair market value of $3,000. The entry to record the acquisition of the equipment would include a:
A) debit to Equipment for $1,200.
B) credit to Paid-in Capital in Excess of Par Value-Common for $1,800.
C) credit to Common Stock for $3,000.
D) credit to Equipment for $3,000.
22) When a company sells stock at an amount less then par value, the amount is referred to as:
A) a discount.
B) a premium.
C) a bonus.
D) Companies cannot sell stock for more than par value.
23) If stock shares are sold at more than their par value, the excess money is called:
A) earnings.
B) paid-in capital in excess of par value.
C) gain on issue of stock.
D) discount on issue of stock.
24) Nelson Inc. sells 430 shares of its $16 par common stock for $31 per share. The entry would entail the
following credit(s):
A) Cash of $13,330.
B) Paid-in Capital in Excess of Par Value-Common for $6,880; Common Stock for $6,450.
C) Paid-in Capital in Excess of Par Value-Common for $6,450; Common Stock for $6,880.
D) Common Stock for $13,330.
25) Common stock sold at a discount is called:
A) at par.
B) above par.
C) at a premium.
D) below par.
26) When Common Stock is sold at a premium:
A) an asset increases and stockholders’ equity increases.
B) an asset increases and liabilities increase.
C) a liability increases and stockholders’ equity increases.
D) an asset decreases and stockholders’ equity decreases.
27) Rhubarb Corporation’s outstanding stock is 160 shares of $107, 11% cumulative nonparticipating
preferred stock and 2,000 shares of $19 par value common stock. Rhubarb paid $2,200 cash dividends
during the year. Common stockholders received: (Round any intermediate calculations to the nearest
cent, and your final answer to the nearest dollar.)
A) $0.
B) $38,000.
C) $2,200.
D) $317.