Chapter 11- MBUS 300

Fred and Barney started a partnership. During Year 1, Fred invested $20,000 in the business and Barney invested $32,000. The partnership agreement called for each partner to receive an annual distribution equal to 15% of his capital contribution. Any further earnings were to be retained in the business and divided equally between the partners. The partnership reported net income of $38,000 during Year 1. How will the $38,000 of net income be split between Fred and Barney respectively? (Hint: Consider both the cash withdrawals and allocation of remaining income.)

$18,100 $19,900 Cash withdrawals (that is, annual distributions):Fred: $20,000 × 15% = $3,000Barney: $32,000 × 15% = $4,800Allocation of remaining income of $30,200 (or $38,000 − $3,000 − $4,800):Fred: $30,200 × 50% = $15,100Barney: $30,200 × 50% = $15,100Split of net income of $38,000:Fred: $3,000 + $15,100 = $18,100Barney: $4,800 + $15,100 = $19,900

Curtain Co. paid dividends of $6,000, $12,000, and $20,000 during Year 1, Year 2, and Year 3, respectively. The company had 1,000 shares of 5%, $200 par value preferred stock outstanding that paid a cumulative dividend. What is the total amount of dividends paid to common shareholders during Year 3?

$8,000 Preferred dividend = 1,000 Outstanding shares × Par value of $200 per share × 5% = $10,000Dividends in arrears at end of Year 1 = Preferred dividend of $10,000 − Dividends paid in Year 1 of $6,000 = $4,000Dividends in arrears at end of Year 2 = Preferred dividend of $10,000 + Dividend in arrears from Year 1 of $4,000 − Dividends paid in Year 2 of $12,000 = $2,000Year 3 Dividends to common shareholders = Dividends paid in Year 3 of $20,000 − (Preferred dividend of $10,000 + Dividend in arrears from Year 2 of $2,000) = $8,000

Which of the following entities would have a "Paid-in Capital in Excess" account in the equity section of the balance sheet?

A corporation Any amount received above the par or stated value is recorded in an account called Paid-in Capital in Excess of Par (or Stated) Value. Only a corporation issues stock; thus, only corporations have this type of account.

Which of the following is a disadvantage of a sole proprietorship? a)Personal liability b)Double taxation c)Entrenched management d)Excessive regulation

A. Unlike corporate stockholders, the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies. The benefit of limited liability is one of the most significant reasons limited liability companies and corporations are so popular.

Which of the following statements best describes the term "par value?"

An amount used in determining a corporation's legal capital Par value is an arbitrary value assigned to stock by the board of directors; like stated value, par value designates legal capital.

On February 2, Year 1, Farmer Corporation issued 9,000 shares of no-par stock for $17 per share. Within two hours of the issue, the stock's price jumped on the New York Stock Exchange to $21 per share. Which of the following answers describes the effect of the February 2 transaction on the elements of the financial statements?

Assets:153,000 = Liab:NA + SE:153,000 + Rev:NA − Exp:NA = NI:NA Cash Flow:153,000 FA

Which form of business organization is established as a separate legal entity? a)None of these b)Sole proprietorship c)Corporation d)Partnership

C.

Which of the following entities would report income tax expense on its income statement?

Corporation. Because proprietorships and partnerships are not separate taxable entities, company earnings are taxable to the owners rather than the company itself. On the other hand, corporations pay income taxes on their earnings.

What is meant by the term "double taxation?" a)A sole proprietorship must pay income taxes to both the state government and the federal government. b)A sole proprietorship must pay income taxes on its net income and the owner is also required to pay income taxes on withdrawals. c)In a partnership, both partners are required to claim their share of net income on their tax returns. d)Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on their dividends.

D.

Blair Scott started a sole proprietorship by depositing $75,000 cash in a business checking account. During the accounting period, the business borrowed $30,000 from a bank, earned $18,000 of net income, and Scott withdrew $12,000 cash from the business. Based on this information, what is the balance in Scott's capital account at the end of the accounting period? a)$111,000 b)$72,000 c)$93,000 d)$81,000

D. Ending capital = Beginning capital + Contributions − Withdrawals + Net incomeEnding capital = $0 + $75,000 − $12,000 + $18,000 = $81,000

An advantage of the corporate form of business organization is that corporations are free from double taxation.

False

Establishing a sole proprietorship generally requires the owner to get a charter from the state government.

False

Lack of ease in transferability of ownership is one of the disadvantages of the corporate form of business organization.

False

The balance sheet of a sole proprietorship will report two equity accounts: one for amounts contributed by the owner, and one for the earnings of the business.

False

Van Buren Corporation issued 5,000 shares of $6 par common stock for $24 per share. For this transaction, Common Stock should be credited (increased) for $120,000.

False

Preferred stockholders' claims to a corporation's assets take precedence over the claims of some creditors.

False Preferred stock often has a liquidation value. In case of bankruptcy, preferred stockholders must be paid the liquidation value before any assets are distributed to common stockholders. However, preferred stockholder claims still fall behind creditor claims.

The Securities and Exchange Commission (SEC) has the authority to set and enforce auditing, attestation, quality control, and ethics standards for auditors of public companies.

False The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to enforce the securities laws. Congress gave the SEC legal authority to establish accounting principles for corporations that are registered on the exchanges. The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) The PCAOB has the authority to set and enforce auditing, attestation, quality control, and ethics standards for auditors of public companies.

The number of shares of stock outstanding generally is greater than the number of shares of stock issued.

False The number of shares issued is normally equal to or greater than the number of shares outstanding.

A partner is responsible for his/her own actions, but not for actions taken by another partner on behalf of the partnership.

False Unlike corporate stockholders, the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies. In fact, partners are responsible not only for their own actions but also for those taken by any other partner on behalf of the partnership.

All corporations are subject to extensive government regulation.

False. The extent of government regulation depends on the size and distribution of ownership interests of the corporation.

Fixit Corporation issued 20,000 shares of $20 par value common stock at its current market price of $32. How does this event affect total stockholders' equity?

It increases by $640,000. The event increases assets and stockholders' equity by $640,000 (or $32 per share × 20,000 shares). The increase in stockholders' equity is divided into two parts, $400,000 of par value (or $20 per share × 20,000 shares) and $240,000 ($640,000 − $400,000) received in excess of par value.

Which of the following is not considered an advantage of the corporate form of business organization?

Lack of government regulation Few laws specifically affect the operations of proprietorships and partnerships. Corporations, however, are heavily regulated.

Which of the following terms designates the maximum number of shares of stock that a corporation may issue?

Number of shares authorized As part of the regulatory function, states approve the maximum number of shares of stock that corporations are legally permitted to issue. This maximum number is called authorized stock.

On January 12, Year 1, Gilliam Corporation issued 550 shares of $12 par-value common stock for $15 per share. The number of shares authorized is 5,000, and the number of shares outstanding prior to this transaction was 1,200. Which of the following describes the effect of the January 12 transaction on the elements of the financial statements? Assets=Liab.+Com. Stk.+Pd-in ExcessRev.−Exp.=Net Inc.Stmt. ofCash Flows A.6,600=NA+6,600+NANA−NA=NA6,600 FA B.8,250=NA+8,250+NANA−NA=NA8,250 FA C.8,250=NA+6,600+1,650NA−NA=NA8,250 FAD.8,250=NA+6,600+1,650NA−NA=NA8,250 IA

Option C Assets (cash) increase by $8,250 (or 550 shares × $15 per share), common stock increases by $6,600 (or 550 shares ×Par value of $12 per share), and paid-in excess increases by $1,650 (or $8,250 − $6,600).The cash inflow of $8,250 is reported in the financing activities section of the statement of cash flows.

Which of the following best describes how each share of par value stock issued is reported in the Common Stock account?

Par or stated value The par value of the stock is recorded in the Common Stock account. Any amount received above the par value is recorded in the Paid-in Capital in Excess of Par (or Stated) Value account.

Which of the following is not normally a preference given to the holders of preferred stock?

The right to vote before the common stockholders at the corporation's annual meeting. Preferred stockholders do not have voting rights

In a closely held corporation, exchanges of stock are limited to transactions between individuals.

True

Weller Corporation issued 10,000 shares of no-par common stock for $25 per share. For this transaction, Common Stock should be credited (increased) for $250,000.

True

A corporation is a legal entity created by the authority of a state government, separate and distinct from its owners.

True A corporation is a separate legal entity from its owners, while a sole proprietorship is not. It must be registered with the state government.

A separate capital account is maintained for each partner in a partnership.

True A separate capital account is maintained for each partner in the business to reflect each partner's ownership interest.

Personal liability is a significant disadvantage of the partnership form of business organization.

True Unlike corporate stockholders, the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies. In fact, partners are responsible not only for their own actions but also for those taken by any other partner on behalf of the partnership. The benefit of limited liability is one of the most significant reasons limited liability companies and corporations are so popular.

A distribution by a sole proprietorship to the owner is called a withdrawal.

True Withdrawals are distributions to the owners of sole proprietorships. Dividends are distributions to corporate stockholders.

The book value of a share of stock is equal to the market or selling price of the stock.

True The book value of a share of stock is calculated as total stockholders' equity divided by number of shares owned by investors.