Question 1

Which of the following is NOT an advantage of organizing a business as a corporation?

Accepted Answer

Double taxation of earnings

Question 2

A corporation issues 10,000 shares of $$2 par value stock at a price of 8 $$per share. What is the correct journal entry for this transaction?

Accepted Answer

Cash $$80,000; Capital Stock 20$$,000; Additional Paid-in Capital $60,000

Question 3

Which of the following statements about treasury stock is TRUE?

Accepted Answer

Treasury stock is a contra-equity account and reduces stockholders’ equity

Question 4

A corporation has 4,000 shares of common stock outstanding and total stockholders’ equity of $130,000. What is the book value per share?

Accepted Answer

$32.50

Question 5

Which of the following is a characteristic of preferred stock?

Accepted Answer

Cumulative dividend rights

Question 6

If a corporation issues no-par stock, how is the issue price recorded?

Accepted Answer

Credited to Capital Stock account only

Question 7

A company has both preferred and common stock outstanding. To calculate the book value per share of common stock, which step is necessary?

Accepted Answer

Deduct the amount assigned to preferred stock and any dividends in arrears from total stockholders’ equity, then divide by the number of common shares outstanding

Question 8

Which of the following is NOT a basic right of stockholders?

Accepted Answer

To set corporate policies

Question 9

What is the effect of a 2-for-1 stock split on the par value and number of shares outstanding?

Accepted Answer

Par value is halved; number of shares is doubled

Question 10

Which of the following is TRUE regarding dividends in arrears for cumulative preferred stock?

Accepted Answer

They must be paid before any dividends can be paid to common stockholders

Question 11

A corporation reacquires 1,600 shares of its own $$5 par stock at 90 $$per share. How is this transaction recorded?

Accepted Answer

Treasury Stock $$144,000; Cash 144$$,000

Question 12

When treasury stock is reissued at a price above its cost, the excess is:

Accepted Answer

Credited to Additional Paid-in Capital: Treasury Stock

Question 13

Which of the following is NOT a reason why businesses incorporate?

Accepted Answer

Ability to avoid income taxes

Question 14

Which of the following is a disadvantage of the corporate form of business?

Accepted Answer

Heavy taxation (double taxation)

Question 15

Which of the following best describes the market price of common stock?

Accepted Answer

It is determined by investors’ expectations about future profitability and risk

Question 16

Which formula correctly calculates book value per share of common stock when both preferred and common stock are outstanding?

Accepted Answer

$$\frac{	ext{Total Stockholders' Equity} - 	ext{Preferred Stock} - 	ext{Dividends in Arrears}}{	ext{Number of Common Shares Outstanding}}$$

Question 17

Which of the following is TRUE regarding the reporting of market value in the issuing corporation’s balance sheet?

Accepted Answer

Market value is not reported in the equity section

Question 18

Which of the following is classified as a financing activity in the statement of cash flows?

Accepted Answer

Issuance of capital stock for cash

Question 19

If a corporation reissues treasury stock at a price below cost, what happens?

Accepted Answer

Additional Paid-in Capital: Treasury Stock is debited for the excess of cost over reissue price

Question 20

Which of the following is TRUE about stock splits?

Accepted Answer

Stock splits reduce the market price per share and increase the number of shares outstanding

Stockholders’ Equity: Paid-In Capital and Corporate Equity

Study Guide - Practice Questions

Study Guide - Flashcards