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Accounting, 9e (Horngren)
Chapter 12 Corporations: Paid-in Capital and the Balance Sheet
Learning Objective 12-1
1) The formation of a corporation is generally less complicated than the formation of a partnership.
Answer: FALSE
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
2) A corporation is a separate legal entity formed under the laws of a particular state.
Answer: TRUE
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
3) Stockholders of a corporation have unlimited liability for the corporation's debt.
Answer: FALSE
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
4) A disadvantage of the corporation is the separation between the owners of the corporation (the stockholders) and the managers of the corporation, which can sometimes result in a conflict of interests.
Answer: TRUE
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
5) Which of the following is a TRUE statement about a corporation?
A) The owners of a corporation have co-ownership of the property of the corporation.
B) A corporation is not taxed on the corporation's business income.
C) A corporation has a limited life.
D) The owners of a corporation have limited liability for the corporation's debts.
Answer: D
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
6) Which of the following characteristics of a corporation limits a stockholder's loss to the amount of his or her investment in the stock of the corporation?
A) Transferability of ownership
B) Limited liability
C) Separate legal entity
D) Separation of ownership and management
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
7) Which of the following statements describes the corporate characteristic termed no mutual agency?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on corporate dividends and gains from sale of stock.
Answer: C
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
8) Which of the following statements describes the corporate characteristic termed limited liability?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on corporate dividends and gains from sale of stock.
Answer: A
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
9) Which of the following statements describes the corporate characteristic termed double taxation?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on corporate dividends and gains from sale of stock.
Answer: D
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
10) Which of the following statements describes the corporate characteristic of easy transfer of corporate ownership?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on corporate dividends and gains from sale of stock.
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
11) Which of the following corporate characteristics is a disadvantage of the corporate form of business?
A) Limited liability
B) Double taxation
C) No mutual agency
D) Transferability of ownership
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
12) Which of the following is a disadvantage of the corporate form of business?
A) Separation of ownership and management
B) Continuous life
C) The potential to raise large amounts of capital
D) No mutual agency
Answer: A
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
13) What authority determines how many shares of stock a corporation may issue?
A) A vote by the board of directors
B) The rules of GAAP
C) Regulations of the Securities and Exchange Commission
D) The government laws in the state where the business is incorporated
Answer: D
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
14) Which of the following describes the term outstanding stock?
A) The shares of stock that are held by the stockholders
B) The shares of stock that have been sold for the highest price
C) The total amount of stock that has been authorized by state law
D) The total amount of stock that has not been sold yet
Answer: A
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
15) Which of the following characteristics is an advantage of the corporate form of business?
A) Higher degree of government regulation
B) The potential to raise large amounts of capital
C) Separation of ownership and management
D) Double taxation
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
Learning Objective 12-2
1) Different classes and types of stock carry different degrees of risk for the shareholder.
Answer: TRUE
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
2) Corporations must issue common stock, but may or may not decide to issue preferred stock.
Answer: TRUE
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
3) All forms and classes of stock carry voting rights.
Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
4) Every corporation issues preferred stock.
Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
5) Paid-in capital is equity that is generated internally by corporate business transactions.
Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
6) Retained earnings is equity that is generated internally by corporate business transactions.
Answer: TRUE
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
7) All corporations must issue both common and preferred shares of stock.
Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
8) Which of the following represents one of the basic rights of stockholders?
A) Stockholders may sell their stock back to the company if they wish.
B) Stockholders may authorize a business contract on behalf of the corporation.
C) Stockholders may participate in management by voting on corporate matters.
D) Stockholders may determine at what price the company issues stock.
Answer: C
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
9) Which of the following represents one of the basic rights of stockholders?
A) Stockholders may sell their stock back to the company if they wish.
B) Stockholders may authorize a business contract on behalf of the corporation.
C) Stockholders may determine at what price the company issues stock.
D) Stockholders may receive dividends from corporate earnings.
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
10) Which of the following represents one of the basic rights of stockholders?
A) Stockholders may sell their stock back to the company if they wish.
B) Stockholders can claim a portion of the corporate assets in the event the company is liquidated.
C) Stockholders may authorize a business contract on behalf of the corporation.
D) Stockholders may determine at what price the company issues stock.
Answer: B
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
11) Which of the following represents one of the basic rights of stockholders?
A) Stockholders can maintain their proportionate ownership if the corporation issues new stock.
B) Stockholders may sell their stock back to the company if they wish.
C) Stockholders may authorize a business contract on behalf of the corporation.
D) Stockholders may determine at what price the company issues stock.
Answer: A
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
12) Which of the following describes the par value of stock?
A) Par value is the current selling price of stock.
B) Par value is the highest price for which a share can sell.
C) Par value is the price paid if the corporation purchases its own stock back.
D) Par value is a nominal, or minimal, amount assigned to shares of stock by the corporation.
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
13) The two basic sources of equity are:
A) common stock and bonds.
B) common stock and preferred stock.
C) paid-in capital and retained earnings.
D) loans from banks and gifts from donors.
Answer: C
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
14) Paid-in capital consists of:
A) amounts paid by customers.
B) capital raised by issuing bonds.
C) earnings generated by the corporation.
D) amounts received from stockholders.
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
15) Which of the following describes retained earnings?
A) Internally generated capital that results from profitable business transactions
B) Externally generated capital that is contributed by shareholders
C) Externally generated capital that is raised from banks and other creditors
D) Internally generated capital that results from employees' contributions
Answer: A
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
16) Which of the following describes preferred stock?
A) Stock that sells for a very high price
B) Stock that is sold to employees of the company as a performance incentive
C) Stock that is purchased by the corporation for investment purposes
D) Stock which gives shareholders certain preferences and advantages over common stock
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
17) Which of the following is a TRUE statement about no-par stock?
A) No-par stock has zero value.
B) No-par stock has been purchased by the corporation for investment purposes.
C) No-par stock is a form of common stock that does not carry par value.
D) No-par stock is a form of preferred stock without voting rights.
Answer: C
Diff: 1
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
18) Which of the following types of stock are considered to be LEAST risky for investors?
A) Common stock
B) Par value stock
C) No-par stock
D) Preferred stock
Answer: D
Diff: 2
LO: 12-2
EOC Ref: S12-2
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
19) Which of the following is an advantage of preferred stock?
A) Preferred shareholders are guaranteed that they will not take a loss on their investment.
B) Preferred shareholders have higher voting rights than common shareholders.
C) Preferred shareholders may sell their shares for a price higher than that of common stock.
D) Preferred shareholders have the first claim on dividend funds.
Answer: D
Diff: 2
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
20) Which of the following is an advantage of preferred stock?
A) Preferred shareholders generally receive a fixed amount of dividends before common stockholders do.
B) Preferred shareholders are guaranteed that they will not take a loss on their investment.
C) Preferred shareholders have higher voting rights than common shareholders.
D) Preferred shareholders may sell their shares for a price higher than that of common stock.
Answer: A
Diff: 2
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
21) Which of the following is an advantage of preferred stock?
A) In the event of liquidation, preferred shareholders are guaranteed to get their investment back in full.
B) In the event of liquidation, preferred shareholders have first claim on remaining corporate assets.
C) In the event of liquidation, preferred shareholders may sell their shares for higher amounts than common stock.
D) In the event of liquidation, preferred shareholders may retain their proportionate share of voting rights.
Answer: B
Diff: 2
LO: 12-2
EOC Ref: S12-2
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
Learning Objective 12-3
1) When a corporation sells 10,000 shares of $10 par value common stock for $120,000, the Common stock account is credited for $100,000.
Answer: TRUE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
2) Stock sold for amounts in excess of par value results in a gain reported on the income statement.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
3) The stock of publicly owned corporations is bought and sold on stock exchanges, such as the New York Stock Exchange.
Answer: TRUE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Content/Knowledge
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
4) When a company sells stock for more than the par value, it will record a gain on sale for the amount in excess of par.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Content/Knowledge
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
5) Osbourne Company issued 50,000 shares of common stock in exchange for manufacturing equipment. The equipment was valued at $1,000,000. The stock has par value of $0.01 per share. Osbourne should record a gain on the sale of stock for the difference between the equipment's market value and the stock's current market value.
Answer: FALSE
Diff: 2
LO: 12-3
EOC Ref: E12-17
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
6) Most preferred stock is sold at a price higher than its par value.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Content/Knowledge
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
7) If a company's share prices go up from the original issue price, the company will record income for the amount of the gain.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
8) No gains or losses are ever recorded by a company when they sell or issue shares of their own stock.
Answer: TRUE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
9) Which of the following would be included in the entry to record the issuance of 5,000 shares of $10 par value common stock at $13 per share cash?
A) Cash would be debited for $65,000.
B) Common stock would be debited for $50,000.
C) Common stock would be credited for $65,000.
D) Paid-in capital in excess of par—common would be debited for $5,000.
Answer: A
Explanation: A) Calculations: 5,000 × $13 = $65,000
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
10) Retained earnings represents:
A) the assets of the corporation less the liabilities.
B) capital contributed by the stockholders of a corporation.
C) the accumulated profits of the corporation less dividends paid out.
D) a liability on the corporate balance sheet.
Answer: C
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Content/Knowledge
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
11) Which of the following occurs when a shareholder invests cash in a corporation in exchange for stock?
A) Both liabilities and stockholders' equity are increased.
B) Both assets and stockholders' equity are increased.
C) One asset is increased and another asset is decreased.
D) Both assets and liabilities are increased.
Answer: B
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
12) The following information is from the balance sheet of Tudor Corporation as of December 31, 2014.
Preferred stock, $100 par / $ 500,000Paid-in capital in excess of par—preferred / 35,000
Common stock, $1 par / 190,000
Paid-in capital in excess of par—common / 380,000
Retained earnings / 131,500
Total stockholders' equity / $1,236,500
What was the average issue price of the common stock shares?