Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
1. Twenty percent of all businesses in the United States are corporations, and they account for 80% of the total business
dollars generated.
a.
True
b.
False
2. A corporation is a separate entity for accounting purposes but not for legal purposes.
a.
True
b.
False
3. The financial loss that each stockholder in a corporation can incur is usually limited to the amount invested by the
stockholder.
a.
True
b.
False
4. Under the Internal Revenue Code, corporations are required to pay federal income taxes.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
5. Double taxation is a disadvantage of a corporation because the corporation has to pay income taxes at twice the rate
applied to partnerships.
a.
True
b.
False
6. The initial stockholders of a newly formed corporation are called directors.
a.
True
b.
False
7. While some businesses have been granted charters under state laws, most businesses receive their charters under federal
laws.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
8. Organizational expenses are classified as intangible assets on the balance sheet.
a.
True
b.
False
9. The two main sources of stockholders’ equity are investments contributed by stockholders and net income retained in
the business.
a.
True
b.
False
10. Retained Earnings represents past net income less past dividends, therefore any balance in this account would be listed
on the income statement.
a.
True
b.
False
11. The net increase or decrease in Retained Earnings for a period is recorded by closing entries.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
12. The balance in Retained Earnings should be interpreted as representing surplus cash left over for dividends.
a.
True
b.
False
13. When no-par common stock with a stated value is issued for cash, the common stock account is credited for an
amount equal to the cash proceeds.
a.
True
b.
False
14. The par value of common stock must always be equal to its market value on the date the stock is issued.
a.
True
b.
False
15. For accounting purposes, stated value is treated the same way as par value.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
16. The issuance of common stock affects both paid-in capital and retained earnings.
a.
True
b.
False
17. The main source of paid-in capital is from issuing stock.
a.
True
b.
False
18. The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares
issued.
a.
True
b.
False
19. The amount of capital paid in by the stockholders of the corporation is called legal capital.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
20. If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividends per share would be $4.
a.
True
b.
False
21. If 50,000 shares are authorized, 41,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding
shares is 43,000.
a.
True
b.
False
22. Preferred stockholders must receive their current-year dividends before the common stockholders can receive any
dividends.
a.
True
b.
False
23. If a corporation is liquidated, preferred stockholders are paid before the creditors and before the common
stockholders.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
24. Paid-in capital may originate from real estate transactions.
a.
True
b.
False
25. The par value of stock is an assigned per share amount defined in many states as legal capital.
a.
True
b.
False
26. A large public corporation normally uses registrars and transfer agents to maintain records of the stockholders.
a.
True
b.
False
27. When common stock is issued in exchange for land, the land should be recorded in the accounts at the par value of the
stock issued.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
28. When a corporation issues stock at a premium, it reports the premium as an other income item on the income
statement.
a.
True
b.
False
29. When no-par stock is issued, Common Stock is credited for the selling price of the stock issued.
a.
True
b.
False
30. A large retained earnings account means that there is cash available to pay dividends.
a.
True
b.
False
31. When the board of directors declares a cash or stock dividend, this action decreases retained earnings.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
32. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of
$1 per share would amount to $15,000.
a.
True
b.
False
33. The declaration of a cash dividend decreases a corporation’s stockholders’ equity and decreases its assets.
a.
True
b.
False
34. One of the prerequisites to paying a cash dividend is sufficient retained earnings.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
35. Cash dividends become a liability to a corporation on the date of record.
a.
True
b.
False
36. The declaration and issuance of a stock dividend does not affect the total amount of a corporation’s assets, liabilities,
or stockholders’ equity.
a.
True
b.
False
37. The declaration of a stock dividend decreases a corporation’s stockholders’ equity and increases its liabilities.
a.
True
b.
False
38. Before a stock dividend can be declared or paid, there must be sufficient cash.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
39. The day on which the board of directors of the corporation distributes a dividend is called the declaration date.
a.
True
b.
False
40. A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.
a.
True
b.
False
41. The stock dividends distributable account is listed in the current liability section of the balance sheet.
a.
True
b.
False
42. Cash dividends are normally paid on shares of treasury stock.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
43. The cost method of accounting for the purchase and sale of treasury stock is a commonly used method.
a.
True
b.
False
44. Under the cost method, when treasury stock is purchased by the corporation, the par value and the price at which the
stock was originally issued are important.
a.
True
b.
False
45. If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is
reported on the income statement.
a.
True
b.
False
46. A sale of treasury stock may result in a decrease in paid-in capital. All decreases should be charged to Paid-In Capital
from Sale of Treasury Stock.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
47. Treasury Stock is listed in the stockholders’ equity section on the balance sheet.
a.
True
b.
False
48. A restriction/appropriation of retained earnings establishes cash assets that are set aside for a specific purpose.
a.
True
b.
False
49. A prior period adjustment should be reported as an adjustment to the retained earnings balance at the beginning of the
period in which the adjustment was made.
a.
True
b.
False
50. The amount of a corporation’s retained earnings that has been restricted/appropriated should be reported in the notes to
the financial statements.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
51. The cost of treasury stock is deducted from total paid–in capital and retained earnings in determining total
stockholders’ equity.
a.
True
b.
False
52. The retained earnings statement may be combined with the income statement.
a.
True
b.
False
53. A corporation has 10,000 shares of $100 par stock outstanding. If the corporation issues a 5-for-1 stock split, the
number of shares outstanding after the split will be 40,000.
a.
True
b.
False
54. The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more
investors to enter the market for the company’s shares.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
55. The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of
additional shares, is called a stock split.
a.
True
b.
False
56. A corporation has 12,000 shares of $20 par stock outstanding that has a current market value of $150. If the
corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $50.
a.
True
b.
False
57. A stock split results in a transfer at market value from retained earnings to paid-in capital.
a.
True
b.
False
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
58. If a company has preferred stock, the preferred stock dividend is added to net income when computing earnings per
common share.
a.
True
b.
False
59. Which of the following is not a characteristic of a corporation?
a.
The financial loss that a stockholder may suffer from owning stock in a public company is limited.
b.
Cash dividends paid by a corporation are deductible as expenses by the corporation.
c.
A corporation can own property in its name.
d.
Corporations are required to file federal income tax returns.
60. Characteristics of a corporation include
a.
a limited lifespan
b.
direct management by the shareholders (owners)
c.
its inability to own property
d.
shareholders who have limited liability
61. One of the main disadvantages of the corporate form is the
a.
inability to raise large amounts of capital
b.
double taxation of dividends
c.
charter
d.
requirement to stock
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
62. A disadvantage of the corporate form of business entity is
a.
single taxation of dividends
b.
unlimited liability for stockholders
c.
corporations are subject to more governmental regulations
d.
the ease of transfer of ownership
63. Under the corporate form of business organization,
a.
ownership rights are easily transferred
b.
a stockholder is personally liable for the debts of the corporation
c.
corporations are not subject to the Sarbanes-Oxley Act
d.
stockholders wishing to sell their corporate shares must get the approval of other stockholders
64. Those most responsible for the major policy decisions of a corporation are the
a.
management
b.
board of directors
c.
employees
d.
stockholders
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
65. Which one of the following would not be considered an advantage of the corporate form of organization?
a.
government regulation
b.
separate legal existence
c.
continuous life
d.
limited liability of stockholders
66. Which of the following is not true of a corporation?
a.
It may enter into binding legal contracts in its own name.
b.
It may sue and be sued.
c.
The acts of its owners bind the corporation.
d.
It may buy, own, and sell property.
67. The ability of a corporation to obtain capital is
a.
less than the ability of a partnership
b.
about the same as the ability of a partnership
c.
restricted because of the limited life of the corporation
d.
enhanced because of limited liability and ease of share transferability
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
68. Which of the following statements concerning taxation is accurate?
a.
Corporations pay federal income taxes but not state income taxes.
b.
Corporations pay federal, and often state, income taxes.
c.
Only the owners must pay taxes on corporate income.
d.
Corporations pay income taxes but their owners do not.
69. Stockholders’ equity
a.
is usually equal to cash on hand
b.
includes paid-in capital and liabilities
c.
includes retained earnings and paid–in capital
d.
is shown on the income statement
70. The state charter allows a corporation to issue only a certain number of shares of each class of stock. This amount of
stock is called
a.
treasury stock
b.
issued stock
c.
outstanding stock
d.
authorized stock
Chapter 12 – Corporations: Organization, Stock Transactions, and Dividends
71. Which of the following is not a right possessed by common stockholders of a corporation?
a.
the right to vote in the election of the board of directors
b.
the right to receive a minimum amount of dividends
c.
the right to sell their stock to anyone they choose
d.
the right to share in assets upon liquidation
72. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 40,000 shares
were originally issued and 10,000 were subsequently reacquired. What is the number of shares outstanding?
a.
10,000
b.
40,000
c.
30,000
d.
50,000
73. The par value per share of common stock represents the
a.
minimum selling price of the stock established by the articles of incorporation
b.
minimum amount the stockholder will receive when the corporation is liquidated
c.
dollar amount assigned to each share
d.
amount of dividends per share to be received each year