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53 terms

Chapter 13

Corporate Organizations
STUDY
PLAY
A corporation is a separate legal entity apart from its owners.
True
Stockholders in a corporation are personally liable for the debts of the corporation.
False
Double taxation refers to the fact that a corporation pays tax on its taxable earnings and the shareholder also pays personal tax on all of the corporation's taxable income.
False
Common stock in a corporation is the equivalent of owner's capital in a sole proprietorship, both being subject to withdrawal by the owners.
False
The par value of common stock is equivalent to its market price on issuance date.
False
Retained earnings is debited to transfer net income to the retained earnings account during the closing process.
False
A debit balance in retained earnings is referred to as a deficit.
True
Par value is typically higher than the market price of the stock for most corporations
False
When a corporation sells par value stock at an amount greater than par value, paid-in capital in excess of par is debited for the difference between the cash received and the par value of the stock.
False
When a corporation issues stock in exchange for non cash assets, the non cash assets are debited for their book value.
False
The stockholders' equity section of a balance sheet lists common stock first, followed by preferred stock second, and retained earnings last.
False
Dividends decrease both the assets and the retained earnings of a corporation.
True
The entry on the payment date for a cash dividend involves a debit to retained earnings and a credit to cash.
False
Dividends in arrears on cumulative preferred stock are not a liability to the corporation.
True
Dividends become a liability of the corporation of the declaration date.
True
Liquidation value is a term referring to common stock and indicates the amount the corporation must pay for each share of common stock if the corporation were to liquidate.
False
Convertible preferred stock must be converted into common stock when the corporation declares the conversion.
False
Two common profitability measures are rate of return on total assets and rate of return on common stockholders' equity.
True
When taxable income exceeds pretax accounting income, deferred income tax liability is credited.
False
Deferred income tax liability is a current liability on the balance sheet.
False
All of the Following represent advantages of corporations over other business entities except:
a) unlimited stockholders' liability
b) continuity of existence
c) separate legal entity
d) ease of transferring ownership
a) unlimited stockholders' liability
The document used by a state to grant permission to form a corporation is called a:
a) proxy
b) charter
c) stock certificate
d) bylaw agreement
b) charter
Which of the following statements describing a corporation is true?
a) stockholders are the creditors of a corporation.
b) stockholders own the business and manage its day-to-day operations
c) a corporation is subject to greater governmental regulation than a proprietorship or a partnership.
d) when ownership of a corporation changes, the corporation terminates.
c) a corporation is subject to greater governmental regulation than a proprietorship or a partnership.
Paid-in capital represents:
a) investments by the creditors of a corporation
b) capital that the corporation has earned through profitable operations
c) investments by the stockholders of a corporation
d) none of the above
c) investments by the stockholders of a corporation
Retained earnings:
a) is classified as an asset on the corporate balance sheet
b) is part of contributed capital
c) represents investments by the stockholders of a corporation
d) represents capital that the corporation has earned through profitable operations
d) represents capital that the corporation has earned through profitable operations
The owners of a corporation are referred to as:
a) creditors
b) stockholders
c) partners
d) both b and c are correct
b) stockholders
Which of the following forms of business organizations is a district legal entity?
a) partnership
b) corporation
c) proprietorship
d) both a and b are correct
b) corporation
Which of the following forms of business organizations terminates when the ownership structure changes?
a) corporation
b) partnership
c) both a and b
d) neither a nor b
b) partnership
Stockholders' liability for corporation debts is generally limited to:
a) the cost of their investment
b) the market value of the stock
c) the par value of the stock
d) total stockholders' equity
a) the cost of their investment
Which of the following is a disadvantage of the corporate form of business organization?
a) mutual agency
b) government regulation
c) limited liability
d) difficulty in transferring ownership
b) government regulation
A corporation may issue:
a) common stock and preferred stock
b) preferred stock but not common stock
c) common stock but not preferred stock
d) either common of preferred but not both
a) common stock and preferred stock
An owner investment of cash in a corporation increases:
a) assets and increases liabilities
b) one asset and decreases another asset
c) assets and decreases stockholders' equity
d) assets and increases stockholders' equity
d) assets and increases stockholders' equity
All of the following transactions increase stockholders' equity except:
a) issuance of common stock
b) profitable operations
c) declaration of a cash dividend
d) issuance of convertible preferred stock
c) declaration of a cash dividend
A profitable corporation would close out income summary by:
a) debiting income summary and crediting paid-in capital in excess of par
b) debiting income summary and crediting retained earnings
c) crediting income summary and debiting retained earnings
d) crediting income summary and debiting paid-in capital in excess of par
b) debiting income summary and crediting retained earnings
A corporation operating at a loss would close out income summary by:
a) debiting income summary and crediting retained earnings
b) debiting income summary and crediting paid-in capital in excess of par
c) crediting income summary and debiting retained earnings
d) crediting income summary and debiting paid-in capital in excess of par
c) crediting income summary and debiting retained earnings
A debit balance in retained earnings is referred to as a(n):
a) normal balance
b) asset
c) deficit
d) liability
c) deficit
Dividends:
a) are a distribution of cash to the stockholders
b) decrease both the assets and the total stockholders' equity of the corporation
c) increase retained earnings
d) both a and b are correct
d) both a and b are correct
All of the following are basic rights of a common stockholder except:
a) the right to receive a proportionate share of the corporate assets remaining after the corporation pays its liabilities in liquidation
b) the right to receive a proportionate share of the corporate assets prior to the payment of liabilities in liquidation
c) the rights to receive a proportionate share of any dividend
d) the right to vote
b) the right to receive a proportionate share of the corporate assets prior to the payment of liabilities in liquidation
Which of the following is a priority granted to preferred stockholders?
a) voting for the corporate board of directors
b) receiving assets before creditors if the corporation liquidates
c) receiving dividends before common stockholders
d) receiving a guaranteed fixed dollar amount of dividends each year
c) receiving dividends before common stockholders
The entry to record the issuance of 5,000 shares of $10 par common stock for $12.50 per share includes a:
a) debit to cash for $50,000
b) debit to cash for $62,500
c) credit to common stock for $62,500
d) debit to paid-in capital in excess of par-common for $12,500
b) debit to cash for $62,500
The entry to record the issuance of 6,000 shares of no-par common stock for $12.50 per share includes a:
a) credit to cash for $75,000
b) debit to common stock for $75,000
c) credit to common stock for $75,000
d) credit to retained earnings for $75,000
c) credit to common stock for $75,000
Land is acquired by issuing 500 shares of $20 par common stock. The land has a current market value of $12,000. The journal entry requires a:
a) debit to land for $10,000
b) credit to common stock for $12,000
c) credit to paid-in capital in excess of par-common for $12,000
d) credit to paid-in capital in excess of par-common for $2,000
d) credit to paid-in capital in excess of par-common for $2,000
When 35,000 shares of $10 par common stock are issued at $16.50 per share, total paid-in capital:
a) increases by $577,500
b) increases by $350,000
c) increases by $227,500
d) decreases by $577,500
a) increases by $577,500
The entry to record the issuance of 55,000 shares of no-par common stock with a stated value of $8, at $13.50 per share includes a:
a) credit to paid-in capital in excess of stated value common for $440,000
b) debit to cash for $440,000
c) credit to common stock for $440,000
d) debit to paid-in capital in excess of stated value common for $302,500
c) credit to common stock for $440,000
When a corporation issues stock at a price above par, the journal entry includes a:
a) credit to paid-in capital in excess of par
b) credit retained earnings
c) credit to gain on sale of stock
d) none of the above; stock must be sold at par
a) credit to paid-in capital in excess of par
If a city donates a plot of land to a corporation, the journal entry would include a:
a) debit to land for its historical cost
b) debit to donated capital
c) credit to revenue from donations
d) debit to land for its current market value
d) debit to land for its current market value
A corporation received land valued at $85,000 and a building valued at $102,500 from the town of Bedford for free in exchange for moving their corporate headquarters to the torn. The entry to record this transaction includes a credit to:
a) donated capital for $187,500
b) revenue from donations for $187,500
c) retained earnings for $187,500
d) paid-in capital in excess of par for $187,500
a) donated capital for $186,500
Jolly Corporation has the following journal entry recorded on June 15 of the current year: Cash: 27,000
Common Stock: 18,000
Paid-in Capital in Excess of Par-Common: 9,000

The Explanation states the stock was sold for $60 per share. What is the par of the stock, and how many shares were sold?
a) $40 par and 450 shares
b) $20 par and 450 shares
c) $60 par and 300 shares
d) none of the above
a) $40 par and 450 shares
Die Works Corporation exchanges a piece of land for 600 shares of Fighter Corporation's common stock with a par of $30 per share. The land had cost Die Works Corporation $10,000 years ago, and currently has a fair market value of $23,000. What is the total increase to paid-in capital for Fighter Corporation as a result of this exchange?
a) $10,000
b) $23,000
c) $18,000
d) impossible to determine using the given data
b) $23,000
Income tax payable is based of _____ from the income tax return while income tax expense is based on ______ from the income statement.
a) pretax accounting income, taxable income
b) taxable income, pretax accounting income
c) taxable income, gross profit
d) pretax accounting income, gross profit
b) taxable income, pretax accounting income
When pretax accounting income exceeds taxable income:
a) prepaid income tax is debited
b) deferred income tax liability is credited
c) prepaid income tax is credited
d) deferred income tax liability is debited
b) deferred income tax liability is credited
Easy Street Corporation, whose income tax rate is 35%, has pretax accounting income of $730,000 and taxable income of $650,000. The entry to record income tax expense includes:
a) debit to prepaid income tax for $255,500
b) debit to income tax expense for $227,500
c) credit to deferred income tax liability for $28,000
d) credit to income tax payable for $255,500
c) credit to deferred income tax liability for $28,000
Easy Street Corporation, whose income tax rate is 35%, has a taxable income of $662,000 and pretax accounting income of $597,000. The entry to record income tax expense includes a:
a) debit to income tax expense for $208,950
b) credit to income tax payable for $208,950
c) credit to prepaid income tax for $231,700
d) credit to deferred income tax liability for $22,750
a) debit to income tax expense for $208,950