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Exam 8: Proprietorships, Partnerships, and Corporations

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Question 71

Multiple Choice

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Which of the following statements about the Treasury Stock account is correct?

A) Treasury Stock is a liability.
B) The balance in the Treasury Stock account reduces total Stockholders' Equity.
C) Treasury Stock is an asset.
D) The balance in Treasury Stock reduces Retained Earnings.

E) None of the above
F) A) and D)

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Question 72

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The number of shares of treasury stock held by a corporation would be considered to be neither issued nor outstanding.

A) True
B) False

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Question 73

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Austin Corporation was authorized to issue 100,000 shares of $10 par common stock. During 2014 Austin issued 30,000 shares at a market price of $15 per share. On December 1, 2014, Austin declared a cash dividend of $2 per share payable on December 30 to stockholders of record as of December 15. Required: a) Indicate effect on financial statements on the date of declaration, date of record, and date of payment of the cash dividends. Use the model below.

Which of the following is a disadvantage of a sole proprietorship?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ Rogers Co. purchased 1,000 shares of its own stock as treasury stock for $40 per share. The no-par stock had originally been issued at $25 per share. Show the effects of the purchase of the treasury stock. $\begin{array}{|l|l|l|l|l|l|}\text { Assets Liabilities } & \text { Equity } & \text { Revenues } & \text { Expenses } & \begin{array}{c}\text { Net } \\\text { Income }\end{array} & \begin{array}{c}\text { Cash } \\\text { Flow }\end{array}\\\hline&&&\end{array}$

In 2014, Wagner Associates appropriated $65,000 of retained earnings to satisfy the restrictive covenant of a loan agreement. What are the financial statement effects of the appropriation?

A low price-earnings ratio generally means that investors are optimistic about a company's future growth.

Indicate whether each of the following statements is true or false. 1. When a partnership is formed, the responsibilities of the partners should be specified in a legal document, the partnership agreement 2. A closely held corporation is one in which buying and selling shares of stock is limited to transactions between specific individuals 3. The SEC has legal authority for the establishment of accounting policies to be followed by companies registered on stock exchanges 4. The process of forming a sole proprietorship is very complex 5. To form a corporation, the organizers must complete a charter of incorporation and, if approved, the state issues the articles of incorporation

Indicate whether each of the following statements about stockholders' equity is true or false. 1. Preferred stockholders generally have a preference to assets when the company is liquidated 2. The amount of dividends paid on preferred stock usually is limited to a specified amount 3. Preferred stockholders generally have a preference as to dividends 4. Preferred stockholders generally have a preference as to voting on corporate policies 5. Preferred stockholders generally have a preference as to selecting directors of the board

A small, closely-held corporation can avoid double taxation by electing S Corporation status.

An appropriation of retained earnings places a limit on the amount of dividends a corporation can declare.

A corporation must record a liability for cash dividends on the date of record.

The stock market crash in 1929 led to the beginning of extensive regulation of corporations.

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

What is treasury stock?

What is the importance of date of record when a corporation declares a dividend?

Indicate whether each of the following statements is true or false. 1. The price-earnings ratio is computed by dividing the market price per share by the earnings per share 2. Many successful corporations do not pay dividends to their stockholders 3. Careful study of the financial statements will give investors the ability to predict future movements in the market price of a corporation's stock 4. The number of shares to purchase in order to attain significant influence over the operations of a corporation can readily be determined from the financial statements 5. As a general rule, the higher the P/E Ratio, the greater is the optimism for future growth of the corporation

Proprietorships are not separate legal entities; their earnings are taxable to the owners and not to the business itself.

Which of the following represents the normal sequence of items presented in the Stockholders' Equity section of a corporation's balance sheet?

STU Corporation is authorized to issue 500,000 shares of $12.00 par value common stock. As of December 2014, STU's stockholders' equity accounts report the following balances: At the end of 2014, ABD decided to issue a 15% stock dividend, when the market price of the stock was $14 per share. Calculate the number of shares outstanding after the stock dividends are issued.