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Chapter 14: Corporation Accounting

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Chapter 14: Corporation Accounting

24 problems · 0 figures

Multiple Choice 14.1 §14.1 source ↗

Which of the following is not a characteristic that sets preferred stock apart from common stock?
  1. a.
    voting rights
  2. b.
    dividend payments
  3. c.
    transferability
  4. d.
    ownership

Answer

D. ownership

Multiple Choice 14.3 §14.1 source ↗

Your friend is considering incorporating and asks for advice. Which of the following is not a major concern?
  1. a.
    colors for the logo
  2. b.
    which state in which to incorporate
  3. c.
    number of shares of stock to authorize
  4. d.
    selection of the corporation name

Answer

A. colors for the logo

Multiple Choice 14.5 §14.1 source ↗

Which of the following is not one of the five primary responsibilities of the Securities and Exchange Commission (the SEC)?
  1. a.
    inform and protect investors
  2. b.
    regulate securities law
  3. c.
    facilitate capital formation
  4. d.
    assure that dividends are paid by corporations

Answer

D. assure that dividends are paid by corporations

Multiple Choice 14.7 §14.1 source ↗

The number of shares that a corporation’s incorporation documents allows it to sell is referred to as ________.
  1. a.
    issued stock
  2. b.
    outstanding stock
  3. c.
    common stock
  4. d.
    authorized stock

Answer

D. authorized stock

Multiple Choice 14.9 §14.2 source ↗

Stock can be issued for all except which of the following?
  1. a.
    accounts payable
  2. b.
    state income tax payments
  3. c.
    property such as a delivery truck
  4. d.
    services provided to the corporation such as legal fees

Answer

B. state income tax payments

Multiple Choice 14.11 §14.3 source ↗

A company issued 30 shares of $.50 par value common stock for $12,000. The credit to additional paid-in capital would be ________.
  1. a.
    $11,985
  2. b.
    $12,000
  3. c.
    $15
  4. d.
    $10,150

Answer

A. $11,985

Multiple Choice 14.13 §14.3 source ↗

The date the board of directors votes to declare and pay a cash dividend is called the:
  1. a.
    date of stockholder’s meeting
  2. b.
    date of payment
  3. c.
    date of declaration
  4. d.
    date of liquidation

Answer

C. date of declaration

Multiple Choice 14.15 §14.4 source ↗

Stockholders’ equity consists of which of the following?
  1. a.
    bonds payable
  2. b.
    retained earnings and accounts receivable
  3. c.
    retained earnings and paid-in capital
  4. d.
    discounts and premiums on bond payable

Answer

C. retained earnings and paid-in capital

Multiple Choice 14.17 §14.4 source ↗

If a company’s board of directors designates a portion of earnings for a particular purpose due to legal or contractual obligations, they are designated as ________.
  1. a.
    retained earnings payable
  2. b.
    appropriated retained earnings
  3. c.
    cumulative retained earnings
  4. d.
    restricted retained earnings

Answer

D. restricted retained earnings

Multiple Choice 14.19 §14.4 source ↗

Owner’s equity represents which of the following?
  1. a.
    the amount of funding the company has from issuing bonds
  2. b.
    the sum of the retained earnings and accounts receivable account balances
  3. c.
    the total of retained earnings plus paid-in capital
  4. d.
    the business owner’s/owners’ share of the company, also known as net worth or net assets

Answer

D. the business owner’s/owners’ share of the company, also known as net worth or net assets

Multiple Choice 14.21 §14.5 source ↗

Which of the following measures the portion of a corporation’s profit allocated to each outstanding share of common stock?
  1. a.
    retained earnings
  2. b.
    EPS
  3. c.
    EBITDA
  4. d.
    NOPAT

Answer

B. EPS

Multiple Choice 14.23 §14.5 source ↗

The correct formula for the calculation of earnings per share is ________.
  1. a.
    (Net income + Preferred dividends) / Weighted average common shares outstanding
  2. b.
    Net income / Weighted average common shares outstanding
  3. c.
    (Net income – Preferred dividends) / Weighted average common shares outstanding
  4. d.
    (Net income – Preferred dividends) / Treasury shares outstanding

Answer

C. (Net income – Preferred dividends) / Weighted average common shares outstanding

Question 14.1 §14.1 source ↗

Your corporation needs additional capital to fund an expansion. Discuss the advantages and disadvantages of raising capital through the issuance of stock. Would debt be a better option? Why or why not?

Answer

Advantages of raising capital through stock include no repayment, no interest, and no mandatory dividends. Disadvantages include giving up ownership and marketability of stock. Debt requires repayment and an interest component. Interest is tax deductible whereas dividends are not.

Question 14.3 §14.1 source ↗

What factors should a new company consider in deciding in which state to incorporate?

Answer

The incorporation laws and which states have favorable laws for corporations.

Question 14.5 §14.2 source ↗

Why would a company repurchase its own stock?

Answer

To affect the market price, avoid takeover, and limit need for dividend payouts.

Question 14.7 §14.2 source ↗

A corporation issues 6,000 shares of $1 par value stock for a parcel of land valued at $12,000. Prepare the journal entry to reflect this transaction.

Answer

Land 12,000  
     Common Stock   6,000
     Additional Paid-in Capital from Common Stock - 6,000

Question 14.9 §14.2 source ↗

A corporation issues 5,000 shares of $1 par value stock for some equipment with a clearly determined value of $10,000. Prepare the journal entry to reflect this transaction.

Answer

Equipment 10,000  
     Common Stock   5,000
     Additional Paid-in Capital from Common Stock   5,000

Question 14.11 §14.3 source ↗

Assuming the same facts as Exercise 14.10, what is the journal that should be recorded on May 5, the date of payment?

Answer

Dividends Payable 25,000  
     Cash   25,000

Question 14.13 §14.3 source ↗

How does a stock split affect the balance sheet of a corporation?

Answer

In total, there is no change to the total dollar value of the equity section, just a change in the number of shares outstanding and a change in the par or stated value of the stock.

Question 14.15 §14.4 source ↗

What does owners’ equity mean for the owner?

Answer

Owners’ equity is the value of assets in a company that remains after liabilities are fulfilled. It is also referred to as net worth or net assets.

Question 14.17 §14.4 source ↗

Sometimes financial statements contain errors. What type of liabilities may need correction as a prior period adjustment?

Answer

An example would be the omission of a payroll accrual or a warranty estimate.

Question 14.19 §14.5 source ↗

Which financial statements do you need to calculate EPS?

Answer

Comparative balance sheets and income statements.

Question 14.21 §14.5 source ↗

Should investors rely on EPS as an investing tool? Why or why not?

Answer

Yes, as one analytical tool among others.

Question 14.23 §14.5 source ↗

Which is the only ratio required to be reported on the face of a company’s financial statements? What are the two ways the ratio is required to be reported?

Answer

EPS is the only ratio required by GAAP to be reported on the face of the income statement. It must be reported in two ways: basic and diluted (if applicable).

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.