Fundamental Accounting Principles 14th Canadian Edition Volume 2 By Larson - Test Bank

Fundamental Accounting Principles 14th Canadian Edition Volume 2 By Larson – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

c13

Student: ___________________________________________________________________________

1. Reporting procedures are the same for private and public corporations.
   True    False

 

2. A limited liability company is a corporation for professionals such as lawyers and accountants.
   True    False

 

3. A corporation is a legal entity separate from its owners.
   True    False

 

4. Corporations can be either public or limited.
   True    False

 

5. A privately held corporation has a limited life because it is tied to the physical lives of its owners.
   True    False

 

6. Shares are attractive to investors because shareholders are not liable for the corporation’s actions and debts and because shares are easily transferred.
   True    False

 

7. The income of a corporation is taxed twice, first as corporate income and then as personal income to shareholders who receive cash dividends.
   True    False

 

8. An underwriter keeps shareholder records and prepares official lists of shareholders and dividend payments.
   True    False

 

9. The shareholders can vote to pay themselves a dividend.
   True    False

 

10. The statement of changes in equity for a corporation shows both how retained earnings and share capital have changed during the accounting period.
    True    False

 

11. Net incomes or losses are recorded in a share capital account.
    True    False

 

12. The equity of a corporation changes because of net income or losses, distributions of incomes (dividends) and shareholder investments.
    True    False

 

13. Income tax expense is recorded with the operating expenses on the income statement for a corporation.
    True    False

 

14. The equity section of a corporation’s balance sheet is called Corporation Equity.
    True    False

 

15. The two main areas of the equity section of a corporation’s balance sheet are share capital and retained earnings.
    True    False

 

16. The equity section for the single proprietorship can be called owner’s equity because the equity belongs to the owner. The equity section for a corporation can be called shareholders’ equity because the equity belongs to a group of owners known as shareholders.
    True    False

 

17. Whether a business is organized as a corporation or as a proprietorship, the net income reported on the income statement will be the same.
    True    False

 

18. The main differences between net income reported by a proprietorship and a corporation are income tax expense and salaries paid to owners.
    True    False

 

19. Authorized shares are the total number of shares outstanding.
    True    False

 

20. When a corporation sells shares directly, it pays a brokerage house to issue the shares.
    True    False

 

21. A corporation can issue two general types of shares: common and preferred.
    True    False

 

22. Common shares usually carry a preference for dividends.
    True    False

 

23. Special rights for preferred shares may include a preference in receiving dividends and in the distribution of assets if the corporation is liquidated.
    True    False

 

24. One of the preference rights for preferred shares is the right to vote.
    True    False

 

25. If a corporation is authorized to issue 1,000 preferred shares, which have a current market value of $80 per share, it has $80,000 worth of shares outstanding.
    True    False

 

26. Cumulative preferred shares carry the right to be paid both current and all prior periods’ unpaid dividends before any dividends are paid to common shareholders.
    True    False

 

27. Shares are most commonly issued for cash.
    True    False

 

28. If shares are issued for non-cash assets, the assets are always recorded at the current market value of the shares.
    True    False

 

29. Organization costs may be paid for by giving shares to promoters of a corporation in exchange for their services in organizing the corporation.
    True    False

 

30. Whenever the dividend rate on preferred shares is higher than the rate the corporation earns on its assets, the effect of issuing preferred shares is to increase the dividend rate earned by common shareholders.
    True    False

 

31. Corporations issue preferred shares in order to raise capital without sacrificing control of the corporation and to increase the return earned by common shareholders.
    True    False

 

32. The use of preferred shares to increase return to common shareholders is an example of financial leverage.
    True    False

 

33. When preferred shares are issued, this will always cause an increase in the future return to common shareholders.
    True    False

 

34. Preferred shares are seen by some investors as being less risky and having a greater dividend rate than common shares.
    True    False

 

35. When issuing shares, the initial investment is credited to Retained Earnings.
    True    False

 

36. When issuing common shares, the initial investment is credited to Common Shares.
    True    False

 

37. The liability for preferred dividends declared is recorded on the date of record.
    True    False

 

38. Unpaid preferred dividends are called dividends in arrears.
    True    False

 

39. The date of record is the date the directors vote to pay a dividend to shareholders.
    True    False

 

40. The declaration of cash dividends reduces retained earnings.
    True    False

 

41. Dividends represent the distribution of profits to the shareholders of a corporation.
    True    False

 

42. Dividends represent the distribution of profits to the managers of a corporation.
    True    False

 

43. Callable preferred shares give the shareholders the option of exchanging their preferred shares into common shares at a specified rate.
    True    False

 

44. The costs of bringing a corporation into existence, including legal fees, promoters’ fees, and amounts paid to the government are called:
    A. Minimum legal capital.
    B. Contributed capital.
    C. Organization costs.
    D. Financial leverage.
    E. Prepaid expenses.

 

45. A proxy is:
    A. A legal document that gives an agent of a shareholder the power to exercise the voting rights of that shareholder’s shares.
    B. A contractual commitment by an investor to purchase unissued shares and become a shareholder.
    C. An amount of assets defined by law that shareholders must invest and leave invested in a corporation.
    D. The right of common shareholders to protect their proportionate interests in a corporation by having the first opportunity to purchase additional shares of common shares issued by the corporation.
    E. An arbitrary value a corporation places on each of the corporation’s shares.

 

46. Buying shares in a corporation is attractive to investors because:
    A. Shareholders are not liable for the corporation’s actions and debts.
    B. Shares are easily transferred.
    C. A corporation has unlimited life.
    D. Shareholders are not agents of the corporation.
    E. All of these answers are correct.

 

47. The category of equity for a corporation which represents the cumulative net incomes less losses and dividends is called:
    A. Contributed capital.
    B. Preferred shares.
    C. Retained earnings.
    D. Financial leverage.
    E. The income statement.

 

48. When a corporation issues only one class of shares they are:
    A. Special shares.
    B. Preferred shares.
    C. Common shares.
    D. Private shares.
    E. Public shares.

 

49. The financial statement that shows the changes to a corporation’s contributed capital is called:
    A. Balance Sheet.
    B. Statement of Changes in Equity.
    C. Income Statement.
    D. Statement of Contributed Capital.
    E. None of these answers is correct.

 

50. The accounting equation for a corporation is:
    A. Assets = Equity + Liabilities.
    B. Assets – Liabilities = Equity.
    C. Assets = Liabilities + Equity.
    D. All of these answers are correct.
    E. None of these answers is correct.

 

51. The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional shares of common shares issued by the corporation is called:
    A. Preemptive right.
    B. Proxy.
    C. Right to call.
    D. Financial leverage.
    E. Voting right.

 

52. Common shares:
    A. Represent residual equity in a corporation.
    B. Always represent total contributed capital.
    C. Allow shareholders to bind the corporation to contracts because they share in ownership.
    D. Make shareholders liable for acts of the corporation because they share in ownership.
    E. Are usually redeemable.

 

53. The total amount of shares that a corporation’s charter allows it to issue is:
    A. Authorized.
    B. Issued.
    C. Outstanding.
    D. Common.
    E. Preferred.

 

54. The total amount of cash and other assets received by a corporation from its shareholders in exchange for common shares is included in:
    A. Organization costs.
    B. Private held shares.
    C. Contributed capital.
    D. Retained earnings.
    E. Equity.

 

55. The par value of a share is:
    A. Another name for the call price of a share.
    B. A type of callable share.
    C. The market value of the shares on the date of issuance.
    D. An unpaid dividend.
    E. An arbitrary value a corporation places on each of the corporation’s shares.

 

56. Legal costs incurred to get a corporation up and running should be accounted for by debiting:
    A. Retained earnings.
    B. Share capital.
    C. Organization costs.
    D. Cash.
    E. Common shares.

 

57. If a corporation that has only one class of shares, or if there is more than one class, the class that has no preference over the other classes of shares, is called:
    A. Preferred shares.
    B. Common shares.
    C. Convertible preferred shares.
    D. Cumulative preferred shares.
    E. Participating preferred shares.

 

58. Owners of preferred shares often do not have:
    A. Ownership rights to assets of the corporation.
    B. Voting rights.
    C. Preference to dividends.
    D. The right to sell their shares.
    E. Rights in liquidation.

 

59. Dillon Snowboards Ltd issued 60 no-par-value common shares for $10,000. The amount of contributed capital arising from this transaction is:
    A. $100.
    B. $600.
    C. $1,000.
    D. $6,000.
    E. $10,000.

 

60. Quality Cleaning Corp. issued 50 no-par-value common shares for land with a market value of $4,000. Dillon had originally issued common shares at $100 two years ago, but there is currently no market value available for their shares. The amount of contributed capital arising from this transaction is:
    A. $100.
    B. $600.
    C. $1,000.
    D. $4,000.
    E. $6,000.

 

61. A dividend preference for preferred shares means that:
    A. Preferred shareholders are allocated their dividends before any dividends are allocated to common shareholders.
    B. Preferred shareholders are guaranteed dividends.
    C. Dividends are paid quarterly.
    D. Only preferred shareholders will receive dividends.
    E. All of these answers are correct.

 

62. Brian’s Stereo Ltd issued preferred shares that have a $10 dividend. This means that:
    A. Preferred shareholders have a guaranteed dividend.
    B. The amount of the dividend is $10 per year per share.
    C. Preferred shareholders are entitled to 10% of the annual profit.
    D. The market price is $100 per share.
    E. The market price is $10 per share.

 

63. Lucie Corporation was formed on January 1 of the current year. The corporate charter authorized the company to issue 100,000 common shares. During the first month of operation, the corporation issued 300 shares to its lawyer in payment of a $5,600 bill for preparing the articles of incorporation. The entry to record this transaction would include:
    A. A debit to Organization Costs for $3,000.
    B. A debit to Organization Costs for $5,600.
    C. A credit to Organization Costs for $5,600.
    D. A debit to Common Shares for $5,600.
    E. A credit to Common Shares for $3,300.

 

64. Pam Corporation sold 10,000 common shares at $25 per share cash. The entry to record this transaction would include:
    A. A debit to Contributed Capital for $250,000.
    B. A credit to Cash for $250,000.
    C. A credit to Common Shares for $250,000.
    D. A credit to Common Shares for $25,000.
    E. A debit to Common Shares for $250,000.

 

65. Bruce Corporation issued 8,000 common shares in exchange for land that has a fair market value of $184,000. The entry to record this transaction would include:
    A. A debit to Common Shares for $8,000.
    B. A debit to Land for $8,000.
    C. A credit to Land for $184,000.
    D. A credit to Common Shares for $184,000.
    E. A debit to Common Shares for $184,000.

 

66. Barb Inc issued 500 common shares in payment of a $1,900 bill from its accountant for assistance in filing its charter. The entry to record this transaction will include:
    A. A $1,900 credit to Common Shares.
    B. A $1,900 credit to Organization Costs.
    C. A $1,900 debit to Common Shares.
    D. A $1,900 debit to Legal Expense.
    E. A $1,900 debit to Accounting Expense.

 

67. The achievement of an increased return on common shares by paying dividends on preferred shares or interest at a rate that is less than the rate of return earned with the assets invested in the corporation by the preferred shareholders or creditors is called:
    A. Financial leverage.
    B. Contributed capital.
    C. No par value.
    D. Preemptive right.
    E. Capital gain.

 

68. Preferred shares may be issued instead of common shares:
    A. To increase financial leverage.
    B. To prevent dilution of voting ownership.
    C. To appeal to investors who believe that common shares are too risky.
    D. To increase the return earned by common shareholders.
    E. All of these answers are correct.

 

69. All of the following are given as possible motivations for a corporation to issue preferred shares except:
    A. Raise capital with sacrificing voting control.
    B. Increase the return of common shareholders.
    C. Appeal to investors who do not want to invest in common shares.
    D. If the preferred shares are convertible, they are more attractive to potential investors.
    E. Preferred dividends are paid before common dividends.

 

70. For preferred shares to increase the return earned by common shareholders, the preferred dividend rate as a percentage of the capital raised must be:
    A. Equal to the rate of return on common and preferred equity combined.
    B. Lower than the rate of return on common and preferred equity combined.
    C. Higher than the rate of return on common and preferred equity combined.
    D. Both equal to and lower than the rate of return on common and preferred equity combined.
    E. None of these answers is correct.

 

71. The payment of a dividend will reduce the following two accounts:
    A. Common shares and cash
    B. Cash and dividends payable.
    C. Equity and retained earnings.
    D. Retained earnings and dividends payable
    E. Equity and cash

 

72. The date a board of directors votes to pay a dividend is called the:
    A. Date of the annual shareholders meeting.
    B. Date of declaration.
    C. Date of record.
    D. Date of payment.
    E. Liquidating date.

 

73. Preferred shares that give the shareholders the option of exchanging their preferred shares for common shares at a specified rate are known as:
    A. Participating preferred shares.
    B. Callable preferred shares.
    C. Cumulative preferred shares.
    D. Convertible preferred shares.
    E. Noncumulative preferred shares.

 

74. Tech Inc’s board of directors voted to declare a common cash dividend of $.0.75 per share. The company has 15,000 common shares authorized, with 10,000 issued and outstanding. The amount of the dividend is:
    A. $7,500.
    B. $7,125.
    C. $5,625.
    D. $3,750.
    E. $375.

 

75. Ken Corp declared a 0.60 per share common dividend. The company has 20,000 common shares authorized, with 6,000 shares issued and outstanding. A possible journal entry to record the declaration is:
    A.
    B.
    C.
    D.
    E.

 

76. A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared is a:
    A. Participating preferred share.
    B. Callable preferred share.
    C. Cumulative preferred share.
    D. Convertible preferred share.
    E. Noncumulative preferred share.

 

77. Preferred shares that the issuing corporation, at its option, may retire by paying a specified amount to the preferred shareholders plus any dividends in arrears are called:
    A. Convertible preferred shares.
    B. Callable preferred shares.
    C. Private shares.
    D. Cumulative preferred shares.
    E. Participating preferred shares.

 

78. Dallas Sports Ltd has 100 shares of $15, noncumulative, preferred shares outstanding, and $160,000 of common shares outstanding. In the company’s first year of operation, no dividends were paid, but during the second year Dallas Sports paid dividends of $24,000. The dividend should be distributed as follows:
    A. $1,500 preferred; $22,500 common.
    B. $3,000 preferred; $21,000 common.
    C. $12,000 preferred; $12,000 common.
    D. $1,400 preferred; $12,600 common.
    E. $7,000 preferred; $7,000 common.

 

79. Zach Sports Ltd has 1,000 shares of $5.50, cumulative preferred shares and 10,000 common shares issued and outstanding. In the previous year (which was the first year of operations), the company paid total dividends of $1,000. The amount that must be paid to the preferred shareholders in the current year before any dividend is paid to common shareholders is:
    A. $1,000.
    B. $3,500.
    C. $4,500.
    D. $10,000.
    E. $12.000.

 

80. A new corporation ended its first year of operations with assets of $100,000, liabilities of $75,000, and contributed capital (common shares) of $10,000. What was the corporation’s net income for the year?
    A. $25,000.
    B. $65,000.
    C. $90,000.
    D. $75,000.
    E. $15,000.

 

81. Discuss the characteristics of corporations.

 

 

 

 

82. Explain the difference between an income statement for a corporation and an income statement for a sole proprietorship, and discuss why the difference arises.

 

 

 

 

83. Describe the components of shareholders’ equity.

 

 

 

 

84. Discuss the differences between common and preferred shares.

 

 

 

 

85. Explain the type of information used to prepare the journal entries to record the issuance of no par value shares.

 

 

 

 

86. Explain the procedure for preparing journal entries for the declaration and distribution of cash dividends.

 

 

 

 

87. Discuss the effect of the dividend preference for preferred shares.

 

 

 

 

88. The following account balances for Mackenzie Corporation are for the year ended December 31, 2015. Complete an Income Statement for the year assuming the income tax rate is 20%.

 

 

 

 

89. The following account balances for Katherine Corporation are for the year ended October 31, 2015. Complete an Income Statement for the year assuming the income tax rate is 20%.

 

 

 

 

90. Sheryl Inc. is authorized to issue 70,000, $9, cumulative preferred shares, and 750,000 common shares. Prepare journal entries to record the following transactions that occurred during the first year of operations:

 

 

 

 

91. Susan Inc. is authorized to issue 70,000, $5, cumulative, preferred shares, and an unlimited number of common shares. Prepare journal entries to record the following transactions that occurred during the first 3 months of operations:

 

 

 

 

92. Adam Corporation received its charter and began business in 2015. The company was authorized to issue 100,000, $4, noncumulative, preferred shares and 500,000 common shares. Prepare journal entries to record the following transactions that occurred during 2015:

 

 

 

 

93. Justine Corp received its charter and began business in 2015. The company was authorized to issue 20,000, $5, noncumulative preferred shares and an unlimited number of common shares. Prepare journal entries to record the following transactions that occurred during 2015:

 

 

 

 

94. TJ Inc. received its charter and began business in 2015. The company was authorized to issue 28,000, $5, noncumulative preferred shares, and 500,000 common shares. Prepare journal entries to record the following transactions that occurred during 2015:

 

 

 

 

95. On August 1, Gary Corporation issued 20,000 common shares in exchange for land with a fair market value of $205,000. Prepare the journal entry to record the transaction.

 

 

 

 

96. On January 1, Sharon Ltd’s equity was as follows: common shares, unlimited shares authorized and 75,000 shares issued and outstanding.
    Prepare journal entries to record the following transactions:

 

 

 

 

97. Kim Corporation had the following shares outstanding when the board of directors declared a $103,000 cash dividend:

    Allocate the dividend between the preferred and common shareholders assuming the preferred shares are cumulative and are one year in arrears.

 

 

 

 

98. Parker Corp has 1,000 $5, noncumulative, preferred shares outstanding, and $250,000 worth of common shares outstanding. During Parker’s first year of operation, no dividends were paid, but during the second year, the company paid dividends of $45,000. How should the dividends be distributed?

 

 

 

 

99. Sanders Limited, since it was organized in January 2014, has had outstanding 1,200, $15, preferred shares, and 15,000 common shares. The corporation declared and paid dividends each year as shown below. Calculate the total dividends distributed to each class of shares under each of the assumptions given.

 

 

 

 

100. On July 31, Crispy Corp declared a dividend of $0.55 per common share outstanding to the shareholders of record on August 15. The dividend will be paid on August 25. Crispy Corp has unlimited shares authorized and 100,000 shares issued and outstanding. Prepare the journal entry to record the declaration of the dividend.

 

 

 

 

101. The following information and transactions took place during 2015:

     Prepare journal entries for the above transactions.

 

 

 

 

102. During 2015, Lee Corporation reported revenues of $527,000 and expenses of $330,000, and declared cash dividends of $45,000. Retained Earnings on January 1, 2015 was $168,000.

     1. Prepare closing entries at December 31, 2015.
     2. Calculate the balance in Retained Earnings on December 31, 2015.

 

 

 

 

103. During 2015, Moore Corporation had Revenues of $525,000 and Expenses of $423,000 and declared cash dividends of $22,000. Retained Earnings on January 1, 2015 was $210,000.

     1. Prepare closing entries on December 31, 2015.
     2. Calculate the balance in Retained Earnings on December 31, 2015.

 

 

 

 

104. A corporation is responsible for its own acts and debts. This is so because a corporation is _____________________.
     ________________________________________

 

105. Net incomes or losses and dividends of a corporation are recorded in the _____________ account.
     ________________________________________

 

106. ___________________ is the total amount of cash and other assets received by the corporation from its shareholders in exchange for common and preferred shares.
     ________________________________________

 

107. _______________ have special rights that give them priority or senior status over common shares in one or more areas.
     ________________________________________

 

108. The journal entry to record distribution of a cash dividend paid to common shareholders includes a debit to _____________________ and a credit to _________.
     ________________________________________

 

109. Owners of _____________________ have a right to be paid both current and all prior periods’ unpaid dividends before any dividend is paid to common shareholders.
     ________________________________________

 

110. Match each of the following terms with the appropriate definition.

1. Authorized shares	The costs of bringing a corporation into existence, including legal fees, promoters’ fees, and amounts paid to the government to secure the charter.	____
2. Organization costs	A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared.	____
3. Preemptive right	The total amount of shares that a corporation’s charter authorizes it to sell.	____
4. Convertible preferred shares	Preferred shares that the issuing corporation, at its option, may retire by paying a specified amount to the preferred shareholder plus any dividends in arrears.	____
5. Noncumulative preferred shares	The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional common shares issued by the corporation.	____
6. Common shares	Shares of a corporation that has only one class of share.	____
7. Callable preferred shares	Preferred shares that give holders the option of exchanging their preferred shares into common shares at a specified rate.	____
8. Par value	An arbitrary value a corporation places on each of the corporation’s shares.	____

 

111. Match each of the following terms with the appropriate definition.

1. Contributed capital	Preferred shares that give shareholders the option of exchanging their preferred shares for common shares at a specified rate.	____
2. Financial leverage	The amount that must be paid to call and retire a preferred share.	____
3. Market value per share	Obtaining capital, or money, by issuing shares.	____
4. Cumulative preferred shares	Shares that give owners a priority status over common shareholders in one or more ways, such as the payment of dividends or the distribution of assets on liquidation.	____
5. Convertible preferred shares	Arises when a corporation has a debit (abnormal) balance in retained earnings.	____
6. Call price	Preferred shares on which undeclared dividends accumulate until they are paid; common shareholders cannot receive a dividend until all cumulative dividends have been paid.	____
7. Equity financing	Achieving an increased return on common shares by paying dividends on preferred shares or interest on debt at a rate that is less than the rate of return earned with the assets invested in the corporation by the preferred shareholders or creditors.	____
8. Preferred share	The price at which shares are bought or sold.	____
9. Deficit	The total amount of cash and other assets received by the corporation from its shareholders in exchange for common and/or preferred shares.	____

 

 

 

c13 Key

1. Reporting procedures are the same for private and public corporations.
   FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #1
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

2. A limited liability company is a corporation for professionals such as lawyers and accountants.
   FALSE

 

Difficulty: Hard
Larson – Chapter 13 #2
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

3. A corporation is a legal entity separate from its owners.
   TRUE

 

Difficulty: Easy
Larson – Chapter 13 #3
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

4. Corporations can be either public or limited.
   FALSE

 

Difficulty: Easy
Larson – Chapter 13 #4
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

5. A privately held corporation has a limited life because it is tied to the physical lives of its owners.
   FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #5
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

6. Shares are attractive to investors because shareholders are not liable for the corporation’s actions and debts and because shares are easily transferred.
   TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #6
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

7. The income of a corporation is taxed twice, first as corporate income and then as personal income to shareholders who receive cash dividends.
   TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #7
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

8. An underwriter keeps shareholder records and prepares official lists of shareholders and dividend payments.
   FALSE

 

Difficulty: Hard
Larson – Chapter 13 #8
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

9. The shareholders can vote to pay themselves a dividend.
   FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #9
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

10. The statement of changes in equity for a corporation shows both how retained earnings and share capital have changed during the accounting period.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #10
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

11. Net incomes or losses are recorded in a share capital account.
    FALSE

 

Difficulty: Easy
Larson – Chapter 13 #11
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

12. The equity of a corporation changes because of net income or losses, distributions of incomes (dividends) and shareholder investments.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #12
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

13. Income tax expense is recorded with the operating expenses on the income statement for a corporation.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #13
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

14. The equity section of a corporation’s balance sheet is called Corporation Equity.
    FALSE

 

Difficulty: Easy
Larson – Chapter 13 #14
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

15. The two main areas of the equity section of a corporation’s balance sheet are share capital and retained earnings.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #15
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

16. The equity section for the single proprietorship can be called owner’s equity because the equity belongs to the owner. The equity section for a corporation can be called shareholders’ equity because the equity belongs to a group of owners known as shareholders.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #16
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

17. Whether a business is organized as a corporation or as a proprietorship, the net income reported on the income statement will be the same.
    FALSE

 

Difficulty: Hard
Larson – Chapter 13 #17
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

18. The main differences between net income reported by a proprietorship and a corporation are income tax expense and salaries paid to owners.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #18
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

19. Authorized shares are the total number of shares outstanding.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #19
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

20. When a corporation sells shares directly, it pays a brokerage house to issue the shares.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #20
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

21. A corporation can issue two general types of shares: common and preferred.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #21
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

22. Common shares usually carry a preference for dividends.
    FALSE

 

Difficulty: Easy
Larson – Chapter 13 #22
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

23. Special rights for preferred shares may include a preference in receiving dividends and in the distribution of assets if the corporation is liquidated.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #23
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

24. One of the preference rights for preferred shares is the right to vote.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #24
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

25. If a corporation is authorized to issue 1,000 preferred shares, which have a current market value of $80 per share, it has $80,000 worth of shares outstanding.
    FALSE

 

Difficulty: Hard
Larson – Chapter 13 #25
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

26. Cumulative preferred shares carry the right to be paid both current and all prior periods’ unpaid dividends before any dividends are paid to common shareholders.
    TRUE

 

Difficulty: Hard
Larson – Chapter 13 #26
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

27. Shares are most commonly issued for cash.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #27
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

28. If shares are issued for non-cash assets, the assets are always recorded at the current market value of the shares.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #28
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

29. Organization costs may be paid for by giving shares to promoters of a corporation in exchange for their services in organizing the corporation.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #29
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

30. Whenever the dividend rate on preferred shares is higher than the rate the corporation earns on its assets, the effect of issuing preferred shares is to increase the dividend rate earned by common shareholders.
    FALSE

 

Difficulty: Hard
Larson – Chapter 13 #30
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

31. Corporations issue preferred shares in order to raise capital without sacrificing control of the corporation and to increase the return earned by common shareholders.
    TRUE

 

Difficulty: Hard
Larson – Chapter 13 #31
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

32. The use of preferred shares to increase return to common shareholders is an example of financial leverage.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #32
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

33. When preferred shares are issued, this will always cause an increase in the future return to common shareholders.
    FALSE

 

Difficulty: Hard
Larson – Chapter 13 #33
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

34. Preferred shares are seen by some investors as being less risky and having a greater dividend rate than common shares.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #34
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

35. When issuing shares, the initial investment is credited to Retained Earnings.
    FALSE

 

Difficulty: Easy
Larson – Chapter 13 #35
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

36. When issuing common shares, the initial investment is credited to Common Shares.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #36
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

37. The liability for preferred dividends declared is recorded on the date of record.
    FALSE

 

Difficulty: Easy
Larson – Chapter 13 #37
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

38. Unpaid preferred dividends are called dividends in arrears.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #38
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

39. The date of record is the date the directors vote to pay a dividend to shareholders.
    FALSE

 

Difficulty: Easy
Larson – Chapter 13 #39
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

40. The declaration of cash dividends reduces retained earnings.
    TRUE

 

Difficulty: Moderate
Larson – Chapter 13 #40
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

41. Dividends represent the distribution of profits to the shareholders of a corporation.
    TRUE

 

Difficulty: Easy
Larson – Chapter 13 #41
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

42. Dividends represent the distribution of profits to the managers of a corporation.
    FALSE

 

Difficulty: Easy
Larson – Chapter 13 #42
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

43. Callable preferred shares give the shareholders the option of exchanging their preferred shares into common shares at a specified rate.
    FALSE

 

Difficulty: Moderate
Larson – Chapter 13 #43
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

44. The costs of bringing a corporation into existence, including legal fees, promoters’ fees, and amounts paid to the government are called:
    A.Minimum legal capital.
    B. Contributed capital.
    C. Organization costs.
    D. Financial leverage.
    E. Prepaid expenses.

 

Difficulty: Easy
Larson – Chapter 13 #44
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

45. A proxy is:
    A.A legal document that gives an agent of a shareholder the power to exercise the voting rights of that shareholder’s shares.
    B. A contractual commitment by an investor to purchase unissued shares and become a shareholder.
    C. An amount of assets defined by law that shareholders must invest and leave invested in a corporation.
    D. The right of common shareholders to protect their proportionate interests in a corporation by having the first opportunity to purchase additional shares of common shares issued by the corporation.
    E. An arbitrary value a corporation places on each of the corporation’s shares.

 

Difficulty: Moderate
Larson – Chapter 13 #45
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

46. Buying shares in a corporation is attractive to investors because:
    A.Shareholders are not liable for the corporation’s actions and debts.
    B. Shares are easily transferred.
    C. A corporation has unlimited life.
    D. Shareholders are not agents of the corporation.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 13 #46
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

47. The category of equity for a corporation which represents the cumulative net incomes less losses and dividends is called:
    A.Contributed capital.
    B. Preferred shares.
    C. Retained earnings.
    D. Financial leverage.
    E. The income statement.

 

Difficulty: Moderate
Larson – Chapter 13 #47
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

48. When a corporation issues only one class of shares they are:
    A.Special shares.
    B. Preferred shares.
    C. Common shares.
    D. Private shares.
    E. Public shares.

 

Difficulty: Easy
Larson – Chapter 13 #48
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

49. The financial statement that shows the changes to a corporation’s contributed capital is called:
    A.Balance Sheet.
    B. Statement of Changes in Equity.
    C. Income Statement.
    D. Statement of Contributed Capital.
    E. None of these answers is correct.

 

Difficulty: Hard
Larson – Chapter 13 #49
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

50. The accounting equation for a corporation is:
    A.Assets = Equity + Liabilities.
    B. Assets – Liabilities = Equity.
    C. Assets = Liabilities + Equity.
    D. All of these answers are correct.
    E. None of these answers is correct.

 

Difficulty: Moderate
Larson – Chapter 13 #50
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

51. The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional shares of common shares issued by the corporation is called:
    A.Preemptive right.
    B. Proxy.
    C. Right to call.
    D. Financial leverage.
    E. Voting right.

 

Difficulty: Easy
Larson – Chapter 13 #51
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

52. Common shares:
    A.Represent residual equity in a corporation.
    B. Always represent total contributed capital.
    C. Allow shareholders to bind the corporation to contracts because they share in ownership.
    D. Make shareholders liable for acts of the corporation because they share in ownership.
    E. Are usually redeemable.

 

Difficulty: Hard
Larson – Chapter 13 #52
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

53. The total amount of shares that a corporation’s charter allows it to issue is:
    A.Authorized.
    B. Issued.
    C. Outstanding.
    D. Common.
    E. Preferred.

 

Difficulty: Easy
Larson – Chapter 13 #53
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

54. The total amount of cash and other assets received by a corporation from its shareholders in exchange for common shares is included in:
    A.Organization costs.
    B. Private held shares.
    C. Contributed capital.
    D. Retained earnings.
    E. Equity.

 

Difficulty: Moderate
Larson – Chapter 13 #54
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

55. The par value of a share is:
    A.Another name for the call price of a share.
    B. A type of callable share.
    C. The market value of the shares on the date of issuance.
    D. An unpaid dividend.
    E. An arbitrary value a corporation places on each of the corporation’s shares.

 

Difficulty: Moderate
Larson – Chapter 13 #55
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

56. Legal costs incurred to get a corporation up and running should be accounted for by debiting:
    A.Retained earnings.
    B. Share capital.
    C. Organization costs.
    D. Cash.
    E. Common shares.

 

Difficulty: Moderate
Larson – Chapter 13 #56
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

57. If a corporation that has only one class of shares, or if there is more than one class, the class that has no preference over the other classes of shares, is called:
    A.Preferred shares.
    B. Common shares.
    C. Convertible preferred shares.
    D. Cumulative preferred shares.
    E. Participating preferred shares.

 

Difficulty: Easy
Larson – Chapter 13 #57
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

58. Owners of preferred shares often do not have:
    A.Ownership rights to assets of the corporation.
    B. Voting rights.
    C. Preference to dividends.
    D. The right to sell their shares.
    E. Rights in liquidation.

 

Difficulty: Easy
Larson – Chapter 13 #58
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

59. Dillon Snowboards Ltd issued 60 no-par-value common shares for $10,000. The amount of contributed capital arising from this transaction is:
    A.$100.
    B. $600.
    C. $1,000.
    D. $6,000.
    E. $10,000.

 

Difficulty: Moderate
Larson – Chapter 13 #59
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

60. Quality Cleaning Corp. issued 50 no-par-value common shares for land with a market value of $4,000. Dillon had originally issued common shares at $100 two years ago, but there is currently no market value available for their shares. The amount of contributed capital arising from this transaction is:
    A.$100.
    B. $600.
    C. $1,000.
    D. $4,000.
    E. $6,000.

 

Difficulty: Moderate
Larson – Chapter 13 #60
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

61. A dividend preference for preferred shares means that:
    A.Preferred shareholders are allocated their dividends before any dividends are allocated to common shareholders.
    B. Preferred shareholders are guaranteed dividends.
    C. Dividends are paid quarterly.
    D. Only preferred shareholders will receive dividends.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 13 #61
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

62. Brian’s Stereo Ltd issued preferred shares that have a $10 dividend. This means that:
    A.Preferred shareholders have a guaranteed dividend.
    B. The amount of the dividend is $10 per year per share.
    C. Preferred shareholders are entitled to 10% of the annual profit.
    D. The market price is $100 per share.
    E. The market price is $10 per share.

 

Difficulty: Moderate
Larson – Chapter 13 #62
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

63. Lucie Corporation was formed on January 1 of the current year. The corporate charter authorized the company to issue 100,000 common shares. During the first month of operation, the corporation issued 300 shares to its lawyer in payment of a $5,600 bill for preparing the articles of incorporation. The entry to record this transaction would include:
    A.A debit to Organization Costs for $3,000.
    B. A debit to Organization Costs for $5,600.
    C. A credit to Organization Costs for $5,600.
    D. A debit to Common Shares for $5,600.
    E. A credit to Common Shares for $3,300.

 

Difficulty: Moderate
Larson – Chapter 13 #63
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

64. Pam Corporation sold 10,000 common shares at $25 per share cash. The entry to record this transaction would include:
    A.A debit to Contributed Capital for $250,000.
    B. A credit to Cash for $250,000.
    C. A credit to Common Shares for $250,000.
    D. A credit to Common Shares for $25,000.
    E. A debit to Common Shares for $250,000.

 

Difficulty: Moderate
Larson – Chapter 13 #64
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

65. Bruce Corporation issued 8,000 common shares in exchange for land that has a fair market value of $184,000. The entry to record this transaction would include:
    A.A debit to Common Shares for $8,000.
    B. A debit to Land for $8,000.
    C. A credit to Land for $184,000.
    D. A credit to Common Shares for $184,000.
    E. A debit to Common Shares for $184,000.

 

Difficulty: Moderate
Larson – Chapter 13 #65
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

66. Barb Inc issued 500 common shares in payment of a $1,900 bill from its accountant for assistance in filing its charter. The entry to record this transaction will include:
    A.A $1,900 credit to Common Shares.
    B. A $1,900 credit to Organization Costs.
    C. A $1,900 debit to Common Shares.
    D. A $1,900 debit to Legal Expense.
    E. A $1,900 debit to Accounting Expense.

 

Difficulty: Moderate
Larson – Chapter 13 #66
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

67. The achievement of an increased return on common shares by paying dividends on preferred shares or interest at a rate that is less than the rate of return earned with the assets invested in the corporation by the preferred shareholders or creditors is called:
    A.Financial leverage.
    B. Contributed capital.
    C. No par value.
    D. Preemptive right.
    E. Capital gain.

 

Difficulty: Moderate
Larson – Chapter 13 #67
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

68. Preferred shares may be issued instead of common shares:
    A.To increase financial leverage.
    B. To prevent dilution of voting ownership.
    C. To appeal to investors who believe that common shares are too risky.
    D. To increase the return earned by common shareholders.
    E. All of these answers are correct.

 

Difficulty: Moderate
Larson – Chapter 13 #68
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

69. All of the following are given as possible motivations for a corporation to issue preferred shares except:
    A.Raise capital with sacrificing voting control.
    B. Increase the return of common shareholders.
    C. Appeal to investors who do not want to invest in common shares.
    D. If the preferred shares are convertible, they are more attractive to potential investors.
    E. Preferred dividends are paid before common dividends.

 

Difficulty: Hard
Larson – Chapter 13 #69
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

70. For preferred shares to increase the return earned by common shareholders, the preferred dividend rate as a percentage of the capital raised must be:
    A.Equal to the rate of return on common and preferred equity combined.
    B. Lower than the rate of return on common and preferred equity combined.
    C. Higher than the rate of return on common and preferred equity combined.
    D. Both equal to and lower than the rate of return on common and preferred equity combined.
    E. None of these answers is correct.

 

Difficulty: Hard
Larson – Chapter 13 #70
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

71. The payment of a dividend will reduce the following two accounts:
    A.Common shares and cash
    B. Cash and dividends payable.
    C. Equity and retained earnings.
    D. Retained earnings and dividends payable
    E. Equity and cash

 

Difficulty: Moderate
Larson – Chapter 13 #71
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

72. The date a board of directors votes to pay a dividend is called the:
    A.Date of the annual shareholders meeting.
    B. Date of declaration.
    C. Date of record.
    D. Date of payment.
    E. Liquidating date.

 

Difficulty: Easy
Larson – Chapter 13 #72
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

73. Preferred shares that give the shareholders the option of exchanging their preferred shares for common shares at a specified rate are known as:
    A.Participating preferred shares.
    B. Callable preferred shares.
    C. Cumulative preferred shares.
    D. Convertible preferred shares.
    E. Noncumulative preferred shares.

 

Difficulty: Easy
Larson – Chapter 13 #73
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

74. Tech Inc’s board of directors voted to declare a common cash dividend of $.0.75 per share. The company has 15,000 common shares authorized, with 10,000 issued and outstanding. The amount of the dividend is:
    A.$7,500.
    B. $7,125.
    C. $5,625.
    D. $3,750.
    E. $375.

(10,000 x .75)

 

Difficulty: Moderate
Larson – Chapter 13 #74
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Application
 

75. Ken Corp declared a 0.60 per share common dividend. The company has 20,000 common shares authorized, with 6,000 shares issued and outstanding. A possible journal entry to record the declaration is:
    A.
    B.
    C.
    D.
    E.

 

Difficulty: Moderate
Larson – Chapter 13 #75
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Application
 

76. A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared is a:
    A.Participating preferred share.
    B. Callable preferred share.
    C. Cumulative preferred share.
    D. Convertible preferred share.
    E. Noncumulative preferred share.

 

Difficulty: Easy
Larson – Chapter 13 #76
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

77. Preferred shares that the issuing corporation, at its option, may retire by paying a specified amount to the preferred shareholders plus any dividends in arrears are called:
    A.Convertible preferred shares.
    B. Callable preferred shares.
    C. Private shares.
    D. Cumulative preferred shares.
    E. Participating preferred shares.

 

Difficulty: Easy
Larson – Chapter 13 #77
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

78. Dallas Sports Ltd has 100 shares of $15, noncumulative, preferred shares outstanding, and $160,000 of common shares outstanding. In the company’s first year of operation, no dividends were paid, but during the second year Dallas Sports paid dividends of $24,000. The dividend should be distributed as follows:
    A.$1,500 preferred; $22,500 common.
    B. $3,000 preferred; $21,000 common.
    C. $12,000 preferred; $12,000 common.
    D. $1,400 preferred; $12,600 common.
    E. $7,000 preferred; $7,000 common.

 

Difficulty: Hard
Larson – Chapter 13 #78
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Application
 

79. Zach Sports Ltd has 1,000 shares of $5.50, cumulative preferred shares and 10,000 common shares issued and outstanding. In the previous year (which was the first year of operations), the company paid total dividends of $1,000. The amount that must be paid to the preferred shareholders in the current year before any dividend is paid to common shareholders is:
    A.$1,000.
    B. $3,500.
    C. $4,500.
    D. $10,000.
    E. $12.000.

($5.50 x 1,000 x 2) – $1,000

 

Difficulty: Hard
Larson – Chapter 13 #79
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Application
 

80. A new corporation ended its first year of operations with assets of $100,000, liabilities of $75,000, and contributed capital (common shares) of $10,000. What was the corporation’s net income for the year?
    A.$25,000.
    B. $65,000.
    C. $90,000.
    D. $75,000.
    E. $15,000.

 

Difficulty: Moderate
Larson – Chapter 13 #80
Learning Objective: 13-06 Record closing entries for a corporation.
Type: Application
 

81. Discuss the characteristics of corporations.

Corporations are legal entities separate and distinct from their owners. Ownership of corporations is represented by shares. Owners of the shares are called shareholders. Shares issued by corporations are usually transferable and shareholders are not personally liable for acts or debts of the corporation. Corporations are regulated by provincial and federal governments and are subject to income tax.

 

Difficulty: Moderate
Larson – Chapter 13 #81
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

82. Explain the difference between an income statement for a corporation and an income statement for a sole proprietorship, and discuss why the difference arises.

The two statements are identical except that the corporate income statement includes income tax expense, because a corporation is legally a separate entity whose income is taxed. Sole proprietors declare income from their business on their personal income tax forms.

 

Difficulty: Moderate
Larson – Chapter 13 #82
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

83. Describe the components of shareholders’ equity.

Shareholders’ equity is composed of two parts, contributed capital and retained earnings. Contributed capital consists of funds raised by the issuance of shares, either common or preferred. Retained earnings consist of current and prior periods’ earnings not distributed to shareholders as dividends.

 

Difficulty: Easy
Larson – Chapter 13 #83
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

84. Discuss the differences between common and preferred shares.

Both common and preferred shares represent ownership in a corporation. Preferred shares have a priority (senior) status relative to common shares in one or more areas. The most common preference items are dividends and distribution of assets in the event of liquidation. When cash dividends are declared, preferred shareholders receive them before common shareholders. Preferred shareholders usually do not have the voting rights that are assigned to common shareholders. Preferred shares may be convertible to common shares, and may be subject to a call provision which allows the corporation to buy them back under specified conditions.

 

Difficulty: Moderate
Larson – Chapter 13 #84
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Learning Objective: 13-04 Describe and account for cash dividends.
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

85. Explain the type of information used to prepare the journal entries to record the issuance of no par value shares.

If shares have no par value, the entire amount of proceeds from the issuance is credited to the appropriate share account.

 

Difficulty: Easy
Larson – Chapter 13 #85
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

86. Explain the procedure for preparing journal entries for the declaration and distribution of cash dividends.

When the board of directors declares a dividend, on the declaration date, Cash Dividends (or Retained Earnings) is debited and Common Dividends Payable is credited. No journal entry is required on the date of record. On the payment date, Common Dividends Payable is debited and Cash is credited.

 

Difficulty: Moderate
Larson – Chapter 13 #86
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Application
 

87. Discuss the effect of the dividend preference for preferred shares.

Preferred shareholders have the right to receive dividends before common shareholders. When preferred shares are cumulative and in arrears, the preferred shareholders will receive any amount in arrears plus the current dividend before any dividend is distributed to common shareholders.

 

Difficulty: Easy
Larson – Chapter 13 #87
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

88. The following account balances for Mackenzie Corporation are for the year ended December 31, 2015. Complete an Income Statement for the year assuming the income tax rate is 20%.

 

 

Difficulty: Moderate
Larson – Chapter 13 #88
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Application
 

89. The following account balances for Katherine Corporation are for the year ended October 31, 2015. Complete an Income Statement for the year assuming the income tax rate is 20%.

 

 

Difficulty: Moderate
Larson – Chapter 13 #89
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Application
 

90. Sheryl Inc. is authorized to issue 70,000, $9, cumulative preferred shares, and 750,000 common shares. Prepare journal entries to record the following transactions that occurred during the first year of operations:

 

 

Difficulty: Moderate
Larson – Chapter 13 #90
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

91. Susan Inc. is authorized to issue 70,000, $5, cumulative, preferred shares, and an unlimited number of common shares. Prepare journal entries to record the following transactions that occurred during the first 3 months of operations:

 

 

Difficulty: Easy
Larson – Chapter 13 #91
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

92. Adam Corporation received its charter and began business in 2015. The company was authorized to issue 100,000, $4, noncumulative, preferred shares and 500,000 common shares. Prepare journal entries to record the following transactions that occurred during 2015:

 

 

Difficulty: Moderate
Larson – Chapter 13 #92
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

93. Justine Corp received its charter and began business in 2015. The company was authorized to issue 20,000, $5, noncumulative preferred shares and an unlimited number of common shares. Prepare journal entries to record the following transactions that occurred during 2015:

 

 

Difficulty: Moderate
Larson – Chapter 13 #93
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

94. TJ Inc. received its charter and began business in 2015. The company was authorized to issue 28,000, $5, noncumulative preferred shares, and 500,000 common shares. Prepare journal entries to record the following transactions that occurred during 2015:

 

 

Difficulty: Easy
Larson – Chapter 13 #94
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

95. On August 1, Gary Corporation issued 20,000 common shares in exchange for land with a fair market value of $205,000. Prepare the journal entry to record the transaction.

 

 

Difficulty: Easy
Larson – Chapter 13 #95
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Application
 

96. On January 1, Sharon Ltd’s equity was as follows: common shares, unlimited shares authorized and 75,000 shares issued and outstanding.
    Prepare journal entries to record the following transactions:

 

 

Difficulty: Easy
Larson – Chapter 13 #96
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Application
 

97. Kim Corporation had the following shares outstanding when the board of directors declared a $103,000 cash dividend:

    Allocate the dividend between the preferred and common shareholders assuming the preferred shares are cumulative and are one year in arrears.

 

 

Difficulty: Moderate
Larson – Chapter 13 #97
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Application
 

98. Parker Corp has 1,000 $5, noncumulative, preferred shares outstanding, and $250,000 worth of common shares outstanding. During Parker’s first year of operation, no dividends were paid, but during the second year, the company paid dividends of $45,000. How should the dividends be distributed?

Preferred: 1,000 ´$5 = $5,000 (noncumulative – one year only)
Common: $45,000 – $5,000 = $40,000

 

Difficulty: Moderate
Larson – Chapter 13 #98
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Application
 

99. Sanders Limited, since it was organized in January 2014, has had outstanding 1,200, $15, preferred shares, and 15,000 common shares. The corporation declared and paid dividends each year as shown below. Calculate the total dividends distributed to each class of shares under each of the assumptions given.

 

 

Difficulty: Moderate
Larson – Chapter 13 #99
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Application
 

100. On July 31, Crispy Corp declared a dividend of $0.55 per common share outstanding to the shareholders of record on August 15. The dividend will be paid on August 25. Crispy Corp has unlimited shares authorized and 100,000 shares issued and outstanding. Prepare the journal entry to record the declaration of the dividend.

 

 

Difficulty: Easy
Larson – Chapter 13 #100
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Application
 

101. The following information and transactions took place during 2015:

     Prepare journal entries for the above transactions.

 

 

Difficulty: Moderate
Larson – Chapter 13 #101
Learning Objective: 13-04 Describe and account for cash dividends.
Learning Objective: 13-06 Record closing entries for a corporation.
Type: Application
 

102. During 2015, Lee Corporation reported revenues of $527,000 and expenses of $330,000, and declared cash dividends of $45,000. Retained Earnings on January 1, 2015 was $168,000.

     1. Prepare closing entries at December 31, 2015.
     2. Calculate the balance in Retained Earnings on December 31, 2015.

 

 

Difficulty: Moderate
Larson – Chapter 13 #102
Learning Objective: 13-06 Record closing entries for a corporation.
Type: Application
 

103. During 2015, Moore Corporation had Revenues of $525,000 and Expenses of $423,000 and declared cash dividends of $22,000. Retained Earnings on January 1, 2015 was $210,000.

     1. Prepare closing entries on December 31, 2015.
     2. Calculate the balance in Retained Earnings on December 31, 2015.

 

 

Difficulty: Hard
Larson – Chapter 13 #103
Learning Objective: 13-04 Describe and account for cash dividends.
Learning Objective: 13-06 Record closing entries for a corporation.
Type: Application
 

104. A corporation is responsible for its own acts and debts. This is so because a corporation is _____________________.
     A separate legal entity

 

Difficulty: Moderate
Larson – Chapter 13 #104
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Type: Knowledge
 

105. Net incomes or losses and dividends of a corporation are recorded in the _____________ account.
     Retained Earnings

 

Difficulty: Easy
Larson – Chapter 13 #105
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Type: Knowledge
 

106. ___________________ is the total amount of cash and other assets received by the corporation from its shareholders in exchange for common and preferred shares.
     Contributed capital

 

Difficulty: Moderate
Larson – Chapter 13 #106
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

107. _______________ have special rights that give them priority or senior status over common shares in one or more areas.
     Preferred shares

 

Difficulty: Easy
Larson – Chapter 13 #107
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Type: Knowledge
 

108. The journal entry to record distribution of a cash dividend paid to common shareholders includes a debit to _____________________ and a credit to _________.
     Common Dividend Payable; Cash

 

Difficulty: Easy
Larson – Chapter 13 #108
Learning Objective: 13-04 Describe and account for cash dividends.
Type: Knowledge
 

109. Owners of _____________________ have a right to be paid both current and all prior periods’ unpaid dividends before any dividend is paid to common shareholders.
     Cumulative preferred shares

 

Difficulty: Moderate
Larson – Chapter 13 #109
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

110. Match each of the following terms with the appropriate definition.

1. Authorized shares	The costs of bringing a corporation into existence, including legal fees, promoters’ fees, and amounts paid to the government to secure the charter.	2
2. Organization costs	A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared.	5
3. Preemptive right	The total amount of shares that a corporation’s charter authorizes it to sell.	1
4. Convertible preferred shares	Preferred shares that the issuing corporation, at its option, may retire by paying a specified amount to the preferred shareholder plus any dividends in arrears.	7
5. Noncumulative preferred shares	The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional common shares issued by the corporation.	3
6. Common shares	Shares of a corporation that has only one class of share.	6
7. Callable preferred shares	Preferred shares that give holders the option of exchanging their preferred shares into common shares at a specified rate.	4
8. Par value	An arbitrary value a corporation places on each of the corporation’s shares.	8

 

Difficulty: Moderate
Larson – Chapter 13 #110
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Learning Objective: 13-04 Describe and account for cash dividends.
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

111. Match each of the following terms with the appropriate definition.

1. Contributed capital	Preferred shares that give shareholders the option of exchanging their preferred shares for common shares at a specified rate.	5
2. Financial leverage	The amount that must be paid to call and retire a preferred share.	6
3. Market value per share	Obtaining capital, or money, by issuing shares.	7
4. Cumulative preferred shares	Shares that give owners a priority status over common shareholders in one or more ways, such as the payment of dividends or the distribution of assets on liquidation.	8
5. Convertible preferred shares	Arises when a corporation has a debit (abnormal) balance in retained earnings.	9
6. Call price	Preferred shares on which undeclared dividends accumulate until they are paid; common shareholders cannot receive a dividend until all cumulative dividends have been paid.	4
7. Equity financing	Achieving an increased return on common shares by paying dividends on preferred shares or interest on debt at a rate that is less than the rate of return earned with the assets invested in the corporation by the preferred shareholders or creditors.	2
8. Preferred share	The price at which shares are bought or sold.	3
9. Deficit	The total amount of cash and other assets received by the corporation from its shareholders in exchange for common and/or preferred shares.	1

 

Difficulty: Moderate
Larson – Chapter 13 #111
Learning Objective: 13-01 Identify characteristics of corporations and their organization.
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.
Learning Objective: 13-04 Describe and account for cash dividends.
Learning Objective: 13-05 Distribute dividends between common and preferred shares.
Type: Knowledge
 

 

 

c13 Summary

Category	# of Questions
Difficulty: Easy	38
Difficulty: Hard	15
Difficulty: Moderate	58
Larson – Chapter 13	111
Learning Objective: 13-01 Identify characteristics of corporations and their organization.	15
Learning Objective: 13-02 Describe and contrast the specialized components of corporate financial statements.	20
Learning Objective: 13-03 Record the issuance of common and preferred shares and describe their presentation in the equity section of the balance sheet.	50
Learning Objective: 13-04 Describe and account for cash dividends.	20
Learning Objective: 13-05 Distribute dividends between common and preferred shares.	14
Learning Objective: 13-06 Record closing entries for a corporation.	4
Type: Application	29
Type: Knowledge	82