OSX_FinancialAccounting_ISM_Ch14

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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 14: Corporation Accounting ﬂe’s of Accounting, Volume 1: Financial Accnti_ Chapter 14: Corporation Accounting Multiple Choice 1. LO 14.1 Which of the following is not a characteristic that sets preferred stock apart from common stock? A. voting rights B. dividend payments C. transferability D. ownership Solution D 2. LO 14.1 Issued stock is defined as stock that A. is available for sale B. that is held by the corporation C. has been sold to investors D. has no voting rights Solution C 3. LO 14.1 Your friend is considering incorporating and asks for advice. Which of the following 1S not a major concern? A. colors for the logo B. which state in which to incorporate C. number of shares of stock to authorize D. selection of the corporation name Solution A 4. 1.LO 14.1 Par value of a stock refers to the A. issue price of a stock B. value assigned by the incorporation documents C. maximum selling price of a stock D. dividend to be paid by the corporation Solution B Page 1 of 34

OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 14: Corporation Accounting 5. LO 14.1 Which of the following is not one of the five primary responsibilities of the Securities and Exchange Commission (the SEC)? A. inform and protect investors B. regulate securities law C. facilitate capital formation D. assure that dividends are paid by corporations Solution D 6. LO 14.1 When a C corporation has only one class of stock it is referred to as A. stated value stock B. par value stock C. common stock D. preferred stock Solution C 7. LO 14.1 The number of shares that a corporation’s incorporation documents allows it to sell is referred to as A. issued stock B. outstanding stock C. common stock D. authorized stock Solution D 8. LO 14.2 The total amount of cash and other assets received by a corporation from the stockholders in exchange for the shares is A. always equal to par value B. referred to as retained earnings C. always below its stated value D. referred to as paid-in capital Solution D 9. LO 14.2 Stock can be issued for all except which of the following? A. accounts payable B. state income tax payments C. property such as a delivery truck D. services provided to the corporation such as legal fees Page 2 of 34

OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 14: Corporation Accounting Solution B 10. LO 14.3 A company issued 40 shares of $1 par value common stock for $5,000. The journal entry to record the transaction would include which of the following? A. debit of $4,000 to common stock B. credit of $20,000 to common stock C. credit of $40 to common stock D. debit of $20,000 to common stock Solution C 11. LO 14.3 A company issued 30 shares of $.50 par value common stock for $12,000. The credit to additional paid-in capital would be A. $11,985 B. $12,000 C. $15 D. $10,150 Solution A 12. 1O 14.3 A corporation issued 100 shares of $100 par value preferred stock for $150 per share. The resulting journal entry would include which of the following? A. a credit to common stock B. a credit to cash C. adebit to paid-in capital in excess of preferred stock D. a debit to cash Solution D 13. LO 14.3 The date the board of directors votes to declare and pay a cash dividend is called the: A. date of stockholder’s meeting B. date of payment C. date of declaration D. date of liquidation Solution C 14. L.O 14.3 Which of the following is true of a stock dividend? A. Tt is a liability. B. The decision to issue a stock dividend resides with shareholders. C. It does not affect total equity but transfers amounts between equity components. D. It creates a cash reserve for shareholders. Solution C 15. L.O 14.4 Stockholders’ equity consists of which of the following? A. bonds payable B. retained earnings and accounts receivable C. retained earnings and paid-in capital D. discounts and premiums on bond payable Page 3 of 34

OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 14: Corporation Accounting Solution C 16. LO 14.4 Retained earnings is accurately described by all except which of the following statements? A. Retained earnings is the primary component of a company’s earned capital. B. Dividends declared are added to retained earnings. C. Net income is added to retained earnings. D. Net losses are accumulated in the retained earnings account. Solution B 17. LO 14.4 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 A. retained earnings payable B. appropriated retained earnings C. cumulative retained earnings D. restricted retained earnings Solution D 18. LO 14.4 Corrections of errors that occurred on a previous period’s financial statements are called A. restrictions B. deficits C. prior period adjustments D. restatements Solution C 19. LO 14.4 Owner’s equity represents which of the following? A. the amount of funding the company has from issuing bonds B. the sum of the retained earnings and accounts receivable account balances C. the total of retained earnings plus paid-in capital D. the business owner’s/owners’ share of the company, also known as net worth or net assets Solution D 20. LO 14.5 Which of the following is a measurement of earnings that represents the profit before interest, taxes, depreciation and amortization are subtracted? A. net income B. retained earnings C. EBITDA D. EPS Solution C 21. LO 14.5 Which of the following measures the portion of a corporation’s profit allocated to each outstanding share of common stock? A. retained earnings Page 4 of 34

OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 14: Corporation Accounting B. EPS C. EBITDA D. NOPAT Solution B 22. L.O 14.5 The measurement of earnings concept that consists of a company’s profit from operations after taxed are subtracted is A. ROI B. EPS C. EBITDA D. NOPAT Solution D 23. LO 14.5 The correct formula for the calculation of earnings per share is A. (Net income + Preferred dividends) / Weighted average common shares outstandlng B. Net income / Weighted average common shares outstanding C. (Net income — Preferred dividends) / Weighted average common shares outstanding D. (Net income — Preferred dividends) / Treasury shares outstanding Solution C 24. 1.O 14.5 Most analysts believe which of the following is true about EPS? A. Consistent improvement in EPS year after year is the indication of continuous improvement in the company’s earning power. B. Consistent improvement in EPS year after year is the indication of continuous decline in the company’s earning power. C. Consistent improvement in EPS year after year is the indication of fraud within the company. D. Consistent improvement in EPS year after year is the indication that the company will never suffer a year of net loss rather than net income. Solution A Questions Page 5 of 34

OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 14: Corporation Accounting 1. LO 14.1 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? Solution Advantages of raising capital through stock include: no repayment, no interest, and no mandatory dividends. Disadvantages include: dilution of ownership (unless current stockholders purchase the new stock), dividends are not tax deductible, and marketability of stock (if it is not publicly traded). Disadvantages of debt include required repayment of both principal and interest. Advantages include that interest is tax deductible and it does not dilute ownership interests. 2. LO 14.1 How many shares of stock should your new corporation authorize? How did you arrive at your number? Solution There is no numerically correct answer that fits every new corporation. Some advisors would say, “The larger, the better—to give the corporation as many options as possible for future growth.” However, there are guidelines based on the state of incorporation and/or perceived future need. Some states have limits for new corporations (minimums or maximums or both). In Delaware, for example, while there is no maximum, the effective minimum is 5,000 shares. More important are perceived future needs. The number of authorized shares should consider the number of initial stockholders, planned stock option pools, and future funding needs. 3. LO 14.1 What factors should a new company consider in deciding in which state to incorporate? Solution The decision is whether to incorporate in your home state or in another state, such as a “business- friendly” state like Delaware. There are many variables to consider when deciding which state to incorporate in (https://www.entrepreneur.com/article/241528). Each state differs in terms of fees, taxes and other regulations and you want to find the lowest cost and best options for your company. 4. L.O 14.1 What are some of the reasons a business owner might choose the corporate form of business? Solution Advantages of incorporation include being a separate legal entity, having limited liability, transferable ownership, continuing existence, and the ease of raising capital. 5. LO 14.2 Why would a company repurchase its own stock? Solution To affect the market price, avoid takeover, and limit need for dividend payouts. 6. LO 14.2 The following data was reported by Saturday Corporation: o Authorized shares: 30,000 o Issued shares: 25,000 o Treasury shares: 5,000 How many shares are outstanding? Solution 20,000 7. 1.0 14.2 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. Solution Page 6 of 34

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