CHAPTER 12

CORPORATIONS: ORGANIZATION, CAPITAL STOCK

TRANSACTIONS, AND DIVIDENDS

Chapter 12Corporations: Organization, Capital Stock Transactions, and Dividends

Chapter 12Corporations: Organization, Capital Stock Transactions, and

Dividends
TRUE/FALSE
1. Twenty percent of all businesses in the United States are corporations and they account for 80% of
the total business dollars generated.
2. The corporation was defined as a separate legal entity by Chief Justice Marshall during the twentieth
century.
3. A corporation is a separate entity for accounting purposes but not for legal purposes.
4. The financial loss that each stockholder in a corporation can incur is usually limited to the amount
invested by the stockholder.
5. Under the Internal Revenue Code, corporations are required to pay federal income taxes.
6. Double taxation is a disadvantage of a corporation because the same party has to pay taxes twice
on the income.
7. The initial owners of stock of a newly formed corporation are called directors.
8. While some businesses have been granted charters under state laws, most businesses receive their
charters under federal laws.
9. By-laws are part of the business's charter or articles of incorporation.
10. Organizational expenses are classified as intangible assets on the balance sheet.
11. The two main sources of stockholders' equity are investments contributed by stockholders and net
income retained in the business.
12. Retained earnings represents past net incomes less past dividends, therefore any balance in this
account would be listed on the income statement.
13. The balance in retained earnings at the end of the period is created by closing entries.
14. The balance in retained earnings should be interpreted as representing surplus cash left over for
dividends.
15. A deficit is reported in the stockholders' equity section of the balance sheet.
16. The main source of paid-in-capital is from issuing stock.
17. Some corporations have stopped issuing stock certificates to stockholders.
18. The number of shares of outstanding stock is equal to the number of shares authorized minus the
number of shares issued.
19. The amount of capital paid in by the stockholders of the corporation is called legal capital.
20. If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividends per
share would be $4.
21. Preferred stock with a preferential right to dividends in arrears is referred to as participating
preferred.

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22. Ten thousand shares of $100 par, $8 cumulative, participating preferred stock are outstanding. If
dividends have been passed for the preceding 3 years and no dividend has been paid in the current
year, $240,000 of dividends must be declared on preferred stock before a dividend can be declared
on common stock for the current year.
23. Although preferred stockholders have a greater chance of receiving a regular dividend, common
stockholders have a greater chance of receiving large dividends.
24. If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the
number of outstanding shares is 39,000.
25. Preferred stockholders must receive their current year dividends before the common stockholders
can receive any dividends.
26. Dividends in arrears are liabilities of the corporation.
27. Preferred stock with a preferential right to assets on liquidation is referred to as participating
preferred.
28. After an annual dividend on cumulative preferred stock is not paid, the corporation is liable to pay
them.
29. If a corporation is liquidated, preferred stockholders are paid before the creditors and before the
common stockholders.
30. Paid-in capital may originate from real estate donated to the corporation.
31. The par value of stock is an arbitrary per share amount defined in many states as legal capital.
32. A large public corporation normally uses registrars and transfer agents to maintain records of the
stockholders.
33. When common stock is issued in exchange for land, the land should be recorded in the accounts at
the par amount of the stock issued.
34. When a corporation issues stock at a premium, it reports the premium as an other income item on
the income statement.
35. When no-par stock is issued, the Common Stock account is credited for the selling price of the stock
issued.
36. Cost and par value are two methods of accounting for the purchase and sale of treasury stock.
37. 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.
38. 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 in the income statement.
39. The paid-in capital from sale of treasury stock account is debited if the sales price of the treasury
stock sold is greater than its cost.
40. A sale of treasury stock may result in a decrease in paid-in-capital. All decreases should be charged
to the Paid-In-Capital from Sale of Treasury account.
41. Treasury Stock is listed in the stockholders' equity section on the balance sheet.

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42. A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 5for-1 stock split, the number of shares outstanding after the split will be 40,000.
43. 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.
44. Since a stock split changes information of a business, this transaction needs to be recorded.
45. 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.
46. A corporation has 12,000 shares of $20 par value 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.
47. A large retained earnings account means that there is cash available to pay dividends.
48. When the board of director's declares a cash or stock dividend, this action decreases retained
earnings.
49. If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury
stock, a cash dividend of $1 per share would amount to $14,000.
50. Cash dividends are normally paid on shares of treasury stock.
51. Dividends on cumulative preferred stock become a liability of the corporation on the first day of the
fiscal year in which they become in arrears.
52. The declaration of a cash dividend decreases a corporation's stockholders equity and decreases its
assets.
53. One of the prerequisites to paying a cash dividend is sufficient retained earnings.
54. Cash dividends become a liability to a corporation on the date of record.
55. If the market price per share is $25 and a stock dividend of 2,000 shares of $5 par common stock is
declared, the amount debited to the stock dividends account would be $10,000.
56. The declaration and issuance of a stock dividend does not affect the total amount of a corporation's
assets, liabilities, or stockholders' equity.
57. The declaration of a stock dividend decreases a corporation's stockholders' equity and increases its
liabilities.
58. Before a stock dividend can be declared or paid, there must be sufficient cash.
59. The day on which the board of directors of the corporation distributes a dividend is called the
declaration date.
60. The stock dividends distributable account is listed in the current liability section of the balance sheet.
61. When a stock dividend is declared, it becomes a liability.
62. A prior-period adjustments should be reported as an adjustment to the retained earnings balance at
the beginning of the period in which the adjustment was made.

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63. A difference between estimated and actual warranty expense is considered an error and would be
reported as a prior-period adjustment.
64. Prior-period adjustments are common in current accounting because of the complexity of the
financial reporting process.
65. The amount of a corporation's retained earnings that has been restricted/appropriated should be
reported in the notes to the financial statements.
66. A restriction/appropriation of retained earnings establishes cash assets that are set aside for a
specific purpose.
67. The retained earnings statement may be combined with the income statement.
68. If paid-in-capital in excess of par/preferred stock is $30,000, preferred stock is $200,000, paid-incapital in excess of par/common stock is $20,000, common stock is $525,000, and retained earnings
is $105,000 (deficit), the total stockholders' equity is $880,000.
69. The dividend yield indicates the rate of return to stockholders in terms of cash dividend distributions.
70. The dividend yield is computed by dividing dividends per share by earnings per share.
MULTIPLE CHOICE
1. Which of the following is not 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.
2. Characteristics of a corporation include
a. shareholders who are mutual agents
b. direct management by the shareholders (owners)
c. its inability to own property
d. shareholders who have limited liability
3. One of the main disadvantages of the corporate form is the
a. professional management
b. double taxation of dividends
c. charter
d. corporation must issue stock
4. A disadvantage of the corporate form of business entity is
a. mutual agency for stockholders
b. unlimited liability for stockholders
c. corporations are subject to more governmental regulations
d. the ease of transfer of ownership
5. The term deficit is used to refer to a debit balance in which of the following accounts of a
corporation?
a. Retained Earnings
b. Treasury Stock
c. Organizational Expenses
d. Common Stock

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6. 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
7. 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
8. 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
9. If preferred stock has dividends in arrears, the preferred stock must be
a. participating
b. callable
c. cumulative
d. convertible
10. The outstanding stock is composed of 10,000 shares of $100 par, cumulative preferred $8 stock, and
50,000 shares of no-par common stock. Preferred dividends have been paid every year except for
the preceding year and the current year. If $380,000 is to be distributed as a dividend for the current
year, what total amount will be distributed to the common stockholders?
a. $380,000
b. $220,000
c. $80,000
d. $160,000
11. 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 5,000 were subsequently reacquired. What is the
number of shares outstanding?
a. 5,000
b. 35,000
c. 45,000
d. 55,000
12. The outstanding stock is composed of 10,000 shares of $100 par, cumulative preferred 5% stock,
and 50,000 shares of $20 par common stock. Preferred dividends have been paid every year except
for the preceding two years and the current year. If $145,000 is to be distributed as a dividend for
the current year, what total amount will be distributed to the preferred stockholders?
a. $75,000
b. $0
c. $145,000
d. $150,000
13. The par value per share of common stock represents
a. the minimum selling price of the stock established by the articles of incorporation.
b. the minimum amount the stockholder will receive when the corporation is liquidated
c. an arbitrary amount established in the articles of incorporation
d. the amount of dividends per share to be received each year

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14. The price at which a stock can be sold depends upon a number of factors. Which statement below
is not one of those factors?
a. the financial condition, earnings record, and dividend record of the corporation
b. investor expectations of the corporation's earning power
c. how high the par value
d. general business and economic conditions and prospects
15. Which of the following accounts below is reported in the paid-in capital/stockholders' equity section
of the corporate balance sheet?
a. Cash
b. Stock Dividends
c. Organizational Expenses
d. Preferred Stock
16. A corporation issues 2,000 shares of common stock for $ 32,000. The stock has a stated value of
$10 per share. The journal entry to record the stock issuance would include a credit to Common
Stock for
a. $20,000
b. $32,000
c. $12,000
d. $2,000
17. The excess of issue price over par of common stock is termed a(n)
a. discount
b. income
c. deficit
d. premium
18. The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in
payment of legal fees for organizing the corporation includes a credit to
a. Organizational Expenses
b. Goodwill
c. Common Stock
d. Cash
19. The entry to record the issuance of common stock at a price above par includes a debit to
a. Organizational Expenses
b. Common Stock
c. Cash
d. Paid-In Capital in Excess of Par-Common Stock
20. When common stock is issued in exchange for a noncash asset, the transaction should be recorded
at
a. the par value of the stock issued
b. the fair market value of the stock
c the fair market value of the asset acquired
d. the fair market value of the asset acquired or the fair market value of the stock, whichever
can be determined more objectively.
21. Hurd Company acquired a building valued at $160,000 for property tax purposes in exchange for
10,000 shares of its $5 par common stock. The stock is widely traded and selling for $15 per share.
At what amount should the building be recorded by Hurd Company?
a. $50,000
b. $150,000
c. $160,000

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d. $200,000

22. Treasury stock shares are

a. shares held by the U.S. Treasury Department
b. part of the total outstanding shares but not part of the total issued shares of a corporation
c. unissued shares that are held by the treasurer of the corporation
d. issued shares that are held by the treasurer of the corporation
23. Which statement below is not a reason for a corporation to buy back its own stock.
a. resale to employees
b. bonus to employees
c. for supporting the market price of the stock
d. to increase the shares outstanding
24. How is treasury stock shown on the balance sheet?
a. as an asset
b. as a decrease in stockholders' equity
c. as an increase in stockholders' equity
d. treasury stock is not shown on the balance sheet
25. What is the total stockholders' equity based on the following data?
Common Stock
Excess of Issue Price Over Par
Retained Earnings (deficit)
a.
b.
c.
d.

$800,000
375,000
50,000

$1,100,000
$1,125,000
$1,175,000
$1,225,000

26. The excess of sales price of treasury stock over its cost should be credited to
a. Treasury Stock Receivable
b. Premium on Capital Stock
c. Paid-In Capital from Sale of Treasury Stock
d. Income from Sale of Treasury Stock
27. What is the total stockholders' equity based on the following account balances?
Common Stock
Paid-In Capital in Excess of Par
Retained Earnings
Treasury Stock
a.
b.
c.
d.

$400,000
40,000
190,000
20,000

$640,000
$630,000
$610,000
$650,000

28. Treasury stock which was purchased for $2,000 is sold for $2,500. As a result of these two
transactions combined
a. income will be increased by $500
b. stockholders' equity will be increased by $2,500
c. stockholders' equity will be increased by $500
d. stockholders' equity will not change

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29. Treasury stock that had been purchased for $5,400 last month was reissued this month for $7,500.
The journal entry to record the reissuance would include a credit to
a. Treasury Stock for $7,500
b. Paid-In Capital from Treasury Stock for $7,500
c. Paid-In Capital in Excess of Par/Common for $2,100
d. Paid-In Capital from Treasury Stock for $2,100
30. A corporation purchased 1,000 shares of its $5 par common stock at $10 and subsequently sold 500
of the shares at $20. What is the amount of revenue realized from the sale?
a. $0
b. $5,000
c. $2,500
d. $10,000
31.
A corporation purchases 10,000 shares of its own $10 par common stock for $25 per share,
recording it at cost. What will be the effect on total stockholders' equity?
a. increase, $100,000
b. increase, $250,000
c. decrease, $100,000
d. decrease, $250,000
32. In which section of the balance sheet would Treasury Stock be reported?
a. Fixed assets
b. Long-term liabilities
c. Stockholders' equity
d. Intangible assets
33. The excess of cost over sales price of treasury stock should be debited to
a. Loss from Sale of Treasury Stock
b. Organizational Expenses
c. Gain from the sale of Treasury Stock
d. Paid-In Capital from Sale of Treasury Stock
34. In which section of the financial statements would Paid-In Capital from Sale of Treasury Stock be
reported?
a. other expense on income statement
b. intangible asset on balance sheet
c. stockholders' equity on balance sheet
d. other income on income statement
35. The reduction of par or stated value of stock by issuance of a proportionate number of additional
shares is termed a
a. liquidating dividend
b. stock split
c. stock option
d. preferred dividend
36. A corporation has 40,000 shares of $25 par value stock outstanding. If the corporation issues a 4for-1 stock split, the number of shares outstanding after the split will be
a. 160,000 shares
b. 40,000 shares
c. 120,000 shares
d. 10,000 shares
37. When a corporation completes a 3-for-1 stock split
a. the ownership interest of current stockholders is decreased
b. the market price per share of the stock is decreased
c. the par value per share is decreased
d. b and c

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38. A corporation has 50,000 shares of $28 par value stock outstanding that has a current market value
of $160. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to
approximately
a. $7
b. $112
c. $40
d. $640
39. The primary purpose of a stock split is to
a. increase paid-in capital
b. reduce the market price of the stock per share
c. increase the market price of the stock per share
d. increase retained earnings
40. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume
that 50,000 shares were originally issued and 5,000 were subsequently reacquired. What is the
amount of cash dividends to be paid if a $1 per share dividend is declared?
a. $50,000
b. $5,000
c. $100,000
d. $45,000
41. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8.
Subsequently, the company declared a 2% stock dividend on a date when the market price was $11
a share. What is the amount transferred from the retained earnings account to paid-in capital
accounts as a result of the stock dividend?
a. $3,200
b. $6,400
c. $4,800
d. $8,800
42. A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9.
Subsequently, the company declared a 2% stock dividend on a date when the market price was $10
a share. The effect of the declaration and issuance of the stock dividend is to
a. decrease retained earnings, increase common stock, and increase paid-in capital
b. increase retained earnings, decrease common stock, and decrease paid-in capital
c. increase retained earnings, decrease common stock, and increase paid-in capital
d. decrease retained earnings, increase common stock, and decrease paid-in capital
43. Which of the following is not a prerequisite to paying a cash dividend?
a. formal action by the board of directors
b. market value in excess of par value per share
c. sufficient cash
d. sufficient retained earnings
44. The net effect to a corporation of the declaration and payment of a cash dividend is to
a. decrease assets and decrease stockholders' equity
b. decrease liabilities and decrease stockholders' equity
c. increase stockholders' equity and decrease liabilities
d. increase assets and increase stockholders' equity
45. The liability for a dividend is recorded on which of the following dates?
a. the date of record
b. the date of payment

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c. the date of announcement
d. the date of declaration

46. When a stock dividend is declared, which of the following accounts is credited?
a. Common Sock
b. Dividend Payable
c. Stock Dividends Distributable
d. Retained Earnings
47. The entry to record the issuance of stock certificates for a common stock dividend that had been
declared would include a debit to
a. Common Stock
b. Paid-In Capital in Excess of Par-Common Stock
c. Stock Dividends Distributable
d. Cash
48. Cash dividends are usually not paid on which of the following?
a. class B common stock
b. preferred stock
c. treasury stock
d. class A common stock
49. Which of the following is not classified as paid-in capital on the balance sheet?
a. common stock
b. common stock distributable
c. preferred stock
d. treasury stock
50. All of the following are normally found in a corporation's stockholders' equity section except
a. Common Stock
b. Paid-In Capital in Excess of Par
c. Dividends in Arrears
d. Retained Earnings
51. Which of the following amounts should be disclosed in the stockholders' equity section of the
balance sheet?
a. the number of shares of common stock outstanding
b. the number of shares of common stock issued
c. the number of shares of common stock authorized
d. all of the above
52. Significant changes in stockholders' equity are reported in
a. income statement
b. retained earnings statement
c. statement of stockholders' equity
d. statement of cash flows
53. Retained earnings
a. is the same as contributed capital
b. can not have a debit balance
c. changes are summarized in the retained earnings statement
d. over time will have a direct relationship with the amount of cash on hand if the corporation
is profitable
54.Which of the following would appear as a prior-period adjustment?
a. loss resulting from the sale of fixed assets

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b. difference between the actual and estimated uncollectible accounts receivable
c. error in the computation of depreciation expense in the preceding year
d. loss from the restructuring of assets
55. A restriction/appropriation of retained earnings
a. decreases total assets
b. increases total retained earnings
c. decreases total retained earnings
d. has no effect on total retained earnings
56. Which of the following would result in a credit to retained earnings?
a. a net loss for the period
b. an understatement of an expense in a prior period
c. a stock split
d. an understatement of a revenue in the prior period
57. The Rand Corporation began the current year with a retained earnings balance of $25,000. During
the year, the company corrected an error made in the prior year, which was a failure to record
depreciation expense of $3,000 on equipment. Also, during the current year, the company earned
net income of $12,000 and declared cash dividends of $5,000. Compute the year end retained
earnings balance.
a. $29,000
b. $35,000
c. $39,000
d. $45,000
58. Investors who are most interested in the dividend yield are those who invest for
a. market price appreciation
b. current income flow
c. both market price appreciation and current income flow
d. neither market price appreciation or current income flow
59. Dividend yield is most often computed on
a. all common stock
b. all preferred stock
c. both common and preferred stock
d. only common stock sold above par
60. Based on the following information, calculate the dividend yield on common stock
Market price per share
Earnings per share
Dividends per share
Investor's cost per share
a.
b.
c.
d.

$40.00
4.00
1.00
30.00

0.075
0.025
0.133
0.033

61. The following information is available for Derby Co.:

Dividends per share of common stock
Market price per share of common stock

2006
$ 0.80
20.00

a. The dividend yield is 4%, which is of interest to investors seeking an increase in market
price of their stocks.

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b. The dividend yield is 4%, which is of special interest to investors seeking current returns
on their investments.
c. The dividend yield is 25%, which is of interest to bondholders.
d. The dividend yield is 4 times the market price, which is important in solvency analysis.

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