MBUS Chapter 11

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.

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

Which of the following statements about par value is true?

Par value has little connection to the market value of the stock.

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

True As long as the exchanges (buying and selling of shares of stock, often called trading) are limited to transactions between individuals, a company is defined as a closely held corporation.

Chisolm Corporation issued 10,000 shares of $5 par common stock for $22 per share. As a result of this transaction, Chisolm's legal capital increased by $50,000.

True Legal capital is the amount of assets that should be maintained as protection for creditors. It is the number of shares multiplied by the par value. Legal capital = Par value of $5 per share × Number of shares issued of 10,000 = $50,000

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% = $10,000 Dividends in arrears at end of Year 1 = Preferred dividend of $10,000 − Dividends paid in Year 1 of $6,000 = $4,000 Dividends 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 = $2,000 Year 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

Montana Company was authorized to issue 200,000 shares of common stock. The company had issued 50,000 shares of stock when it purchased 10,000 shares of treasury stock. After the purchase of treasury stock, the number of outstanding shares of common stock was which of the following?

40,000 Outstanding stock (total issued stock minus treasury stock) is stock owned by investors outside the corporation. Outstanding shares = 50,000 Issued shares −10,000 Treasury shares = 40,000

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

An amount used in determining a corporation's legal capital

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

Corporation

What is meant by the term "double taxation?"

Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on their dividends.

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

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

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.

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 There is only one equity account in a sole proprietorship, the owner's capital account. Earnings and contributions increase this account and withdrawals decrease it.

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.)

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

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

Number of shares authorized

Which of the following statements about types of business entities is true?

One advantage of the corporation form is the ability to raise capital.

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.

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.

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 When no-par common stock is issued, the common stock account is credited for the entire amount received in the stock issue, which in this case is $250,000 (or 10,000 Shares × Issue price of $25 per share).