CHAPTER 13

INTRODUCTION TO CORPORATIONS

CHAPTER STUDY OBJECTIVES

1. Identify and discuss characteristics of the corporate form of organization. The major characteristics of a corporation are as follows: separate legal existence, limited liability of shareholders, transferable ownership rights, ability to acquire capital, continuous life, government regulations, and corporate income tax. Corporations must be incorporated federally or provincially, and may have shareholders of different classes. Each class of share carries different rights and privileges. The rights of common shareholders are restricted to the right to elect the board of directors, to receive a proportionate share of dividends, if declared, and to receive the remaining assets if the corporation is liquidated. Corporations are managed by the board of directors.

2. Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. When shares are issued, the entire proceeds from the issue become legal capital and are credited to the Common Shares account. When shares are issued for noncash assets or services, the fair value of the consideration received is used if it can be determined. If not, the fair value of the consideration given up is used. The accounting for preferred shares is similar to the accounting for common shares.

Preferred shares typically do not have voting rights but do have priority over common shares to receive: 1. dividends, and 2. assets, if the company is liquidated. The dividend is specified and may be cumulative or noncumulative. Cumulative preferred shares must be paid dividends for the current year as well as any unpaid dividends from previous years before the common shares receive dividends. Noncumulative preferred shares lose the right to unpaid dividends from prior years. In addition, preferred shares may be convertible, redeemable, and/or retractable. Convertible preferred shares allow their holder to convert them into common shares at a specified ratio. Redeemable preferred shares give the corporation the right to redeem the shares for cash; retractable preferred shares give the shareholder the right to convert the shares to cash.

3. Prepare a corporate income statement. Corporate income statements are similar to the income statements for proprietorships and partnerships, with one exception. Income tax expense must be determined based on profit before tax and is reported on the income statement. Profit before tax less income tax expense is equal to profit for the year.

4. Explain and demonstrate the accounting for cash dividends. Dividends are similar to drawings in that they are a distribution of profit to the owners (shareholders). Entries for cash dividends are required at the declaration date and the payment date. Cash dividends reduce assets and shareholders’ equity (retained earnings). Preferred shareholders are paid their dividends first before the common shareholders are entitled to any dividends.

5. Prepare a statement of retained earnings and closing entries for a corporation. Retained earnings are increased by profit, and decreased by losses and dividends. Companies reporting under ASPE are required to prepare a statement of retained earnings showing the beginning balance, changes during the year, and ending balance of Retained Earnings. In a corporation, the Income Summary and dividends accounts are closed to Retained Earnings.

6. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Within the shareholders’ equity section of the balance sheet, all corporations will report contributed capital and retained earnings. Within contributed capital, two classifications may be shown if applicable: 1. share capital and 2. contributed surplus. Corporations reporting under IFRS will also have another component in shareholders’ equity, which will be introduced in Chapter 14.

Return on equity is calculated by dividing profit by average shareholders’ equity. It is an important measure of a company’s profitability.

TRUE-FALSE STATEMENTS

1. Most of the largest Canadian companies are publically held.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

2. A corporation is a legal entity that is combined with the owner’s economic circumstances.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

3. A corporation may be organized for the purpose of making a profit or may be not-for-profit.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

4. A public corporation is a corporation that does NOT issue its shares for sale to the public.

Difficulty: Easy

Bloomcode: Knowledge

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

5. A corporation acts under its own name rather than in the name of its shareholders.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

6. Acts of the shareholders who are NOT official agents of a corporation can legally bind a corporation.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

7. Creditors have access to corporate assets only to have their claims repaid.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

8. A transfer of shares by a shareholder does NOT require the approval of either the corporation or other shareholders.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

9. The transfer of ownership rights between shareholders has no effect on the corporations operating activities.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

10. Organization costs are normally capitalized by public companies.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

11. Articles of incorporation form the corporation’s “constitution”.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

12. The board of directors of a corporation legally owns the corporation.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

13. Companies can only be incorporated under the federal government.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

14. Profits may be either reinvested in a corporation or distributed to its shareholders as dividends.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

15. Dividends in a corporation are the equivalent of drawings in a proprietorship.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

16. Corporations must pay taxes as a legal entity.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

17. The shareholders of a corporation pay tax on corporate profit on an individual basis.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

18. One of the disadvantages of a corporation is that professional managers will run the company.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

19. One of the disadvantages of a corporation is that the company will have continuous life.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

20. Authorized share capital is the amount of the shares that are issued to the shareholders.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

21. The authorization of share capital does NOT result in a formal accounting entry.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

22. The authorization of share capital will have an immediate effect on assets and shareholders’ equity.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

23. Share capital may be distributed to shareholders as dividends.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

24. No par value shares are shares that have NOT been assigned any specific value.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

25. When shares are issued for services or noncash assets, the shares should be recorded at the fair value of the services or noncash assets.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

26. In cases where the fair value of the services and noncash assets cannot be reliably measured, the shares issued should be recorded at the amortized cost of the noncash assets.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

27. Shares can be issued only in exchange for cash.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

28. A corporation can issue more shares than it is authorized in its charter, if the board of directors approves of an increase in the number of authorized shares.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

29. Common shares usually have a cumulative dividend feature.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

30. A corporation must have preferred shares.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

31. One characteristic of preferred shares is a dividend preference.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

32. When a company is liquidated, the common shares will receive proceeds before the preferred shares.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

33. A cumulative dividend feature will mean that unpaid dividends from prior periods will be paid before the current dividend entitlement.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

34. Convertible preferred shares give common shareholders the option of exchanging their bonds for preferred shares.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

35. When a preferred share is exchanged for a common share, cash flow for the company is increased.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

36. A redeemable preferred share gives shareholders the option to redeem shares at their own option rather than the corporation’s option.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

37. Retained earnings are the cumulative profits or losses since incorporation that have been retained within the corporation.

Difficulty: Easy

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

38. Income tax expense is added to income when determining profit.

Difficulty: Easy

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

39. Income tax expense is shown on the income statement.

Difficulty: Easy

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

40. Income taxes only affect the income statement.

Difficulty: Easy

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

41. Corporate income tax is based on the amount of retained earnings that a company has.

Difficulty: Easy

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

42. Dividends in arrears are NOT considered a liability.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

43. There is no obligation to pay dividends until a dividend is declared by the board of directors.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

44. The statement that reflects the changes in retained earnings for the period is called a statement of retained earnings.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

45. Cash dividends are shown as an addition to the statement of retained earnings.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

46. The amount of dividends paid is reported on the statement of retained earnings.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

47. Retained earnings is a temporary account.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

48. A cash dividend account is NEVER closed during the closing process.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

49. When the retained earnings has a debit balance it is called a “deficit”.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

50. A dividend is a pro rata distribution of a portion of a corporation’s retained earnings to its shareholders.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

51. The primary consideration for the decision to declare dividends is whether the company made a profit in the current year.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

52. A company may NOT declare a dividend if there was a loss in the year.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

53. Dividends are distributed from retained earnings.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

54. Companies must have enough cash before they can declare a cash dividend.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

55. Under the Canada Business Corporations Act, a corporation cannot pay a dividend if it would then be unable to pay its liabilities.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

56. If the board of directors has NOT declared a dividend then no liability exists.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

57. Journal entries are made on the date of declaration and on the date of record date.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

58. The ownership of the shares is determined on the date of declaration.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

59. Declaration of cash dividends increases liabilities and decreases shareholders equity.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

60. At the end of each accounting year, the profit for the corporation will be closed into the account called Income Summary.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

61. Contributed capital of a company includes share capital and retained earnings.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

62. Under IFRS, there is a section in shareholders’ equity on the balance sheet called accumulated other comprehensive income.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

63. Retained earnings will be reported on financial statements within the share capital section.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

64. Return on equity can be calculated as average shareholders’ equity divided by profit.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

65. Return on equity will assist a company to measure its cash flow.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

66. Retained earnings are subtracted from share capital to arrive at total shareholders’ equity.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

67. The dominant form of business organization in Canada is

a) the proprietorship.

b) the partnership.

c) the corporation.

d) not known.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

68. Canadian Tire Corporation is an example of a(n)

a) not-for-profit corporation.

b) publicly held corporation.

c) privately held corporation.

d) partnership.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

69. Shareholders of a corporation directly elect

a) the president of the corporation.

b) the board of directors.

c) the controller of the corporation.

d) all of the employees of the corporation.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

70. Which of the following Canadian companies must report under International Financial Reporting Standards?

a) private companies

b) not-for-profit corporations

c) public companies

d) partnerships

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

71. A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a

a) corporation is organized for the purpose of making a profit.

b) corporation is subject to numerous federal and provincial government regulations.

c) corporation is an accounting economic entity.

d) corporation’s temporary accounts are closed at the end of the accounting period.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

72. Which one of the following would NOT be considered an advantage of the corporate form of organization?

a) limited liability of owners

b) separate legal existence

c) continuous life

d) government regulation

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

73. The concept of a "separate legal existence" refers to which form of business organization?

a) partnership

b) proprietorship

c) corporation

d) limited partnership

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

74. The ways that a corporation can be classified by purpose are

a) general and limited.

b) profit and non-profit.

c) provincial and federal.

d) publicly held and privately held.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

75. The two ways that a corporation can be classified by ownership are

a) publicly held and privately held.

b) shares and non-shares.

c) inside and outside.

d) majority and minority.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

76. Which of the following would NOT be true of a privately held corporation?

a) It is sometimes called a closely held corporation.

b) Its shares are regularly traded on the Toronto Stock Exchange.

c) It does not offer its shares for sale to the general public.

d) It is usually smaller than a publicly held company.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

77. Which of the following is NOT true of a corporation?

a) It may buy, own, and sell property.

b) It may sue and be sued.

c) The acts of its owners bind the corporation.

d) It may enter into binding legal contracts in its own name.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

78. Abraham Griffin has invested $ 800,000 in a privately held family corporation. The corporation does NOT do well and must declare bankruptcy. What amount does Griffin stand to lose?

a) up to his total investment of $ 800,000

b) zero

c) the $ 800,000 plus any personal assets the creditors demand

d) $ 400,000

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

79. Which of the following statements reflects the transferability of ownership rights in a corporation?

a) If a shareholder decides to transfer ownership, he must transfer all of his shares.

b) A shareholder may dispose of part or all of his shares.

c) A shareholder must obtain permission of the board of directors before selling shares.

d) A shareholder must obtain permission from at least three other shareholders before selling shares.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

80. A corporate board of directors generally

a) select officers.

b) manage sales targets.

c) makes everyday purchasing decisions.

d) approves vacation periods for top management.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

81. All of the following are examples of organization costs EXCEPT

a) legal fees.

b) accounting fees.

c) directors’ fees.

d) registration costs.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

82. The ability of a corporation to obtain capital is

a) enhanced because of limited liability and ease of share transferability.

b) less than a partnership.

c) restricted because of the limited life of the corporation.

d) about the same as a partnership.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

83. Which of the following statements concerning taxation is accurate?

a) Partnerships pay provincial income taxes but not federal income taxes.

b) Corporations pay federal income taxes but not provincial income taxes.

c) Corporations pay federal and provincial income taxes.

d) Income trusts pay federal and provincial income taxes.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

84. Which of the following statements is NOT considered a disadvantage of the corporate form of organization?

a) additional taxes

b) government regulations

c) limited liability of shareholders

d) separation of ownership and management

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

85. Corporate tax rates are typically

a) higher than personal rates.

b) lower than personal rates.

c) the same as personal rates.

d) Corporations are not taxed; all income is taxed personally when distributed to shareholders.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

86. Which one of the following is NOT an ownership right of a shareholder in a corporation?

a) to vote in the election of directors

b) to declare dividends on the common shares

c) to share in assets upon liquidation

d) to share in corporate profit

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

87. The articles of incorporation can contain all of the following EXCEPT

a) the name of the proposed corporation.

b) the purpose of the proposed corporation.

c) the names and addresses of the incorporators.

d) the names and addresses of the senior management team.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

88. If a corporation has only one class of shares, they are referred to as

a) classless shares.

b) preferred shares.

c) limited liability shares.

d) common shares.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

89. The term residual claim refers to a shareholder's right to

a) receive dividends.

b) share in assets upon liquidation.

c) acquire additional shares when offered.

d) exercise the right to vote.

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

90. Private companies adhering to Canadian GAAP apply which of the following accounting framework(s)?

a) ASPE

b) IFRS

c) ASPE or IFRS

d) ASPE and IFRS

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

91. Which group of users is responsible for selecting the company’s operating policies and selecting officers such as the CEO?

a) management

b) shareholders

c) board of directors

d) chief financial officer

Difficulty: Easy

Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Section Reference: The Corporate Form of Organization

CPA: Financial Reporting

AACSB: Analytic

92. The impact of the company’s shares being sold among investors will

a) cause total shareholders’ equity to increase.

b) cause total assets to decrease.

c) cause retained earnings to decrease.

d) have no effect on the operating activities of the corporation.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

93. The authorization of share capital will

a) cause shareholders’ equity to increase.

b) cause the number of common shares issued to increase.

c) cause the market price of the shares to fall.

d) have no immediate effect on either assets or shareholders’ equity.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

94. Which of the following factors does NOT affect the initial market price of a share?

a) the company's anticipated future earnings

b) the legal capital of the share

c) the current state of the economy

d) the expected dividend rate per share

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

95. Which transaction will cause an increase in cash flow for the corporation?

a) Preferred shares are exchanged for common shares.

b) The company issues common shares for equipment.

c) The company issues common shares.

d) One of the main shareholders sells his shares to his son.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

96. Issued shares are the number of

a) authorized shares that have been sold.

b) shares a corporation is legally able to sell.

c) shares sold each year by the corporation.

d) authorized shares in the corporation’s articles of incorporation.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

97. The authorized shares of a corporation

a) only reflect the initial capital needs of the company.

b) are determined by the company’s board of directors.

c) are indicated in its articles of incorporation.

d) must be recorded in a formal accounting entry.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

98. If Lee Inc. issues 1,000 common shares for $ 5 per share,

a) Common Shares will be credited for $ 5,000.

b) Gain on Sale of Shares will be credited for $ 5,000.

c) Retained Earnings will be credited for $ 5,000.

d) The transaction will be recorded only in a note to the financial statements.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

99. Paris Corporation is a publicly held corporation whose shares, issued at $ 1 per share are actively traded at $ 20 per share. The company issued 1,000 shares to acquire land recently appraised at $ 15,000. When recording this transaction, Paris will

a) debit Land for $ 15,000.

b) credit Common Shares for $ 20,000.

c) debit Land for $ 20,000.

d) credit Gain on Purchase of Land for $ 5,000.

Difficulty: Medium

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

100. London Limited issued 2,000 common shares in payment of its lawyer's bill of $ 8,000. London Limited assured the lawyer that the shares would be worth $ 10,000 within one year. The bill was for services performed in helping the company incorporate. Southern should record this transaction by debiting

a) Legal Fees Expense for $ 10,000.

b) Legal Fees Expense for $ 8,000.

c) Common Shares for $ 10,000.

d) Common Shares for $ 8,000.

Difficulty: Medium

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

101. Under IFRS, corporations that issue shares in return for noncash assets should record the transaction at

a) the fair market value of the asset acquired.

b) the original cost of the asset acquired.

c) the fair market value of the common shares given up.

d) the book value of the common shares given up.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

102. China Corporation has the following shareholders’ equity on December 31, 2021:
Shareholders' equity
Share capital
$ 10 convertible preferred shares,
10,000 shares authorized, 5,000 shares issued $ 0,570,000
Common shares, no par value,
200,000 shares authorized, 90,000 shares issued 1,800,000
Total share capital 2,370,000
Retained earnings 450,000
Total shareholders’ equity $ 2,820,000
If 500 preferred shares are converted into common shares what is the dollar value of the common shares issued?

a) $ 50,000

b) $ 57,000

c) $ 10,000

d) $ 9,000

Difficulty: Medium

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

103. New York Corporation has the following shareholders’ equity on December 31, 2021:
Shareholders' equity
Share capital
$ 10 convertible preferred shares,
10,000 shares authorized, 5,000 shares issued $ 0,570,000
Common shares, no par value,
200,000 shares authorized, 90,000 shares issued 1,800,000
Total share capital 2,370,000
Retained earnings 450,000
Total shareholders’ equity $ 2,820,000
If one preferred share is convertible into 10 common shares, how many common shares are issued when 500 preferred shares are converted?

a) 500

b) 50

c) 5,000

d) 5

Difficulty: Medium

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

104. Peru Corporation has the following shareholders’ equity on December 31, 2021:
Shareholders' equity
Share capital
$ 10 convertible preferred shares,
10,000 shares authorized, 5,000 shares issued $ 0,570,000
Common shares, no par value,
200,000 shares authorized, 90,000 shares issued 1,800,000
Total share capital 2,370,000
Retained earnings 450,000
Total shareholders’ equity $ 2,820,000
What is the dividend amount payable to preferred shareholders in 2021 assuming no shares are converted?

a) $ 50,000

b) $ 900,000

c) $ 100,000

d) $ 500,000

Difficulty: Medium

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

105. Which of the following is NOT generally a right or preference associated with preferred shares?

a) the right to vote

b) first claim to dividends

c) preference to corporate assets in case of liquidation

d) to receive dividends in arrears before common shareholders receive dividends

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

106. The feature that enables the preferred shareholders to exchange their preferred shares for common shares is the

a) redeemable feature.

b) cumulative preference.

c) participating feature.

d) convertible feature.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

107. If preferred shares are cumulative, the

a) preferred dividends not declared in a given year are called dividends in arrears.

b) preferred shareholders and the common shareholders receive equal dividends.

c) preferred shareholders and the common shareholders receive the same total dollar amount of dividends.

d) common shareholders will share in the preferred dividends.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

108. If convertible preferred shares are converted into common shares,

a) a gain on conversion must be recorded if the legal capital of the preferred shares is greater than the legal capital of the common shares.

b) a loss on conversion must be recorded if the legal capital of the preferred shares is less than the legal capital of the common shares.

c) a gain or loss on conversion is not recognized or recorded.

d) the fair value of the preferred shares on the date of conversion is credited to the Common Shares account.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

109. Preferred shares issued with the right of the shareholder to redeem the shares are referred to as

a) redeemable preferred shares.

b) retractable preferred shares.

c) cumulative preferred shares.

d) convertible preferred shares.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

110. Retractable preferred shares

a) do not offer a repayment of principal.

b) are presented in the liability section of the balance sheet.

c) are presented in the equity section of the balance sheet.

d) would be allocated between the liability and equity sections of the balance sheet depending on the exact terms of redemption or retraction.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

111. Toronto Corporation has 5,000 preferred shares that have been issued at $ 50 per share. Each share is convertible into one common share. When the market values of preferred shares are $ 55 and common shares are $ 75, respectively, the 5,000 shares are converted into common shares. The journal entry to record the conversion of the shares is

a) Preferred Shares 500,000
Common Shares 500,000

b) Preferred Shares 375,000
Common Shares 375,000

c) Preferred Shares 250,000
Common Shares 250,000

d) Preferred Shares 75,000
Common Shares 75,000

Difficulty: Medium

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

112. Alexandria Corporation has the following shareholders equity on July 31, 2021:
Shareholders' equity
Share capital
$ 10 preferred shares, cumulative
10,000 shares authorized, 5,000 shares issued $ 2,000,000
Common shares,
600,000 shares authorized, 10,000 shares issued 300,000
Total share capital 2,300,000
Retained earnings 500,000
Total shareholders’ equity $ 2,800,000
The maximum number of common shares that Alexandria can issue is

a) 10,000.

b) 610,000.

c) 600,000.

d) cannot be determined from the information provided.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

113. Under ASPE, corporations that issue shares in return for noncash assets should record the transaction at

a) the fair market value of the asset acquired.

b) the original cost of the asset acquired.

c) the fair market value of the common shares given up.

d) whichever is most reliable, fair value of assets acquired or fair value of shares issued.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

114. Corporations have a

a) limited life.

b) indefinite life.

c) limited legal life.

d) legal life of 20 years.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

115. Which of the following best represents the guidance provided by IFRS when accounting for shares issued for noncash consideration?

a) The transaction should be valued at the more reliably measurable amount of the fair value of the goods/services received or the fair value of the shares given up.

b) The transaction should be valued at the fair value of the shares given up.

c) The transaction should be valued at the fair value of the goods/services received.

d) The transaction can be valued at management’s choice of either the fair value of the goods/services received or the fair value of the shares given up.

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

116. Which of the following is NOT considered a typical feature of preferred shares?

a) priority over common shareholder upon dividend distribution

b) ability to elect the board of directors through voting rights

c) potential to be converted into common shares

d) preference to receive company assets upon liquidation

Difficulty: Easy

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Section Reference: Share Capital

CPA: Financial Reporting

AACSB: Analytic

117. ABC Industries has the following account balances:
Retained earnings $ 75,000
Revenue $ 365,000
Operating Expenses $ 297,000
Interest Expense $ 17,500
Assume an income tax rate of 20%. What is the amount of income tax expense to be reported on the corporate income statement?

a) $ 13,600

b) $ 15,000

c) $ 10,100

d) $ 73,000

Difficulty: Medium

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

118. The Star Wars Industries has the following account balances:
Retained earnings $ 75,000
Revenue $ 365,000
Operating Expenses $ 297,000
Interest Expense $ 17,500
On the corporate income statement what will be the amount reported as “profit” given an income tax rate of 20%?

a) $ 40,400

b) $ 36,900

c) $ 50,500

d) $ 60,000

Difficulty: Medium

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

119. What is the correct journal entry to adjust for income tax expense?

a) Retained Earnings
Income tax payable

b) Income tax expense
Retained Earnings

c) Operating expense
Income tax payable

d) Income tax expense
Income tax payable

Difficulty: Easy

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

120. Income tax expense is based on

a) profit from operations.

b) profit before income taxes.

c) retained earnings balance.

d) profit.

Difficulty: Easy

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

121. Heinfell Inc. reported sales of $ 850,000, cost of goods sold of $ 510,000, and other expenses totalled $ 180,000. If the company’s corporate tax rate is determined to be 26%, how much would Heinfell report as income tax expense in the year?

a) $ 41,600

b) $ 100,000

c) $ 118,400

d) $ 160,000

Difficulty: Medium

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

122. Heinfell Inc. reported sales of $ 850,000, cost of goods sold of $ 510,000, and other expenses totalled $ 180,000. Assuming Heinfell reported net income of $ 100,000 in the year, which of the following entries reflects Heinfell’s income tax expense?

a) debit to Income Tax Payable and credit to Income Tax Expense for $ 60,000

b) debit to Income Tax Expense and credit to Income Tax Payable for $ 100,000

c) debit to Income Tax Expense and credit to Income Tax Payable for $ 60,000

d) debit to Income Tax Payable and credit to Income Tax Expense for $ 100,000

Difficulty: Medium

Learning Objective: Prepare a corporate income statement.

Section Reference: Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

123.  The advantage of debiting a Cash Dividend account, instead of Retained Earnings, is that
a) no closing entry is required at the end of the accounting period.
b) it allows users to pay the dividends much earlier.
c) it makes it easy to keep track of the dividends declared.
d) Cash Dividend is permanent account whereas Retained Earnings is a temporary account.

Difficulty: Easy
Learning Objective: Explain and demonstrate the accounting for cash dividends.
Section Reference: Cash Dividends
CPA: Financial Reporting

AACSB: Analytic

124. Dividends in arrears

a) are always considered a liability.

b) are a liability when they are declared.

c) are never considered to be a liability.

d) are paid to preferred shareholders only after common shareholders receive their dividends.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

125. Dividends in arrears on cumulative preferred shares

a) never have to be paid.

b) must be paid before common shareholders can receive a dividend.

c) should be recorded as a current liability until they are paid.

d) enable the preferred shareholders to share equally in corporate earnings with the common shareholders.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

126. Dividends in arrears on cumulative preferred shares

a) are considered to be a non-current liability.

b) are considered to be a current liability.

c) only occur when preferred dividends have been declared.

d) should be disclosed in the notes to the financial statements.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

127. Norton Corporation has the following shareholders equity on September 30, 2021:
Shareholders' equity
Share capital
$ 10 preferred shares, cumulative
10,000 shares authorized, 5,000 shares issued $ 5,000,000
Common shares,
200,000 shares authorized, 10,000 shares issued 200,000
Total share capital 5,200,000
Retained earnings 570,000
Total shareholders’ equity $ 5,770,000
On September 15, 2021, Norton Corporation declared a $ 170,000 dividend to be paid on October 15 to shareholders of record on September 30. Assuming that the preferred dividends have NOT been paid since 2019 the amount of dividends per common share for 2021 would be

a) $ 17.

b) $ 2.

c) $ 0.10.

d) $ 10.

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

128. Norton Corporation has the following shareholders equity on September 30, 2021:
Shareholders' equity
Share capital
$ 10 preferred shares, cumulative
10,000 shares authorized, 5,000 shares issued $ 5,000,000
Common shares,
200,000 shares authorized, 10,000 shares issued 200,000
Total share capital 5,200,000
Retained earnings 570,000
Total shareholders’ equity $ 5,770,000
On September 15, 2021, Norton Corporation declared a $ 170,000 dividend to be paid on October 15 to shareholders of record on September 30. Assuming that the preferred dividends have NOT been paid since 2019, the total amount of the dividend paid to the preferred shareholders in 2021 would be

a) $ 50,000.

b) $ 0.

c) $ 170,000.

d) $ 150,000.

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

129. Norton Corporation has the following shareholders equity on September 30, 2021:
Shareholders' equity
Share capital
$ 10 preferred shares, cumulative
10,000 shares authorized, 5,000 shares issued $ 5,000,000
Common shares,
200,000 shares authorized, 10,000 shares issued 200,000
Total share capital 5,200,000
Retained earnings 570,000
Total shareholders’ equity $ 5,770,000
On September 15, 2021, Norton Corporation declared a $ 170,000 dividend to be paid on October 15 to shareholders of record on September 30. Assuming there were no dividends in arrears, the total amount of the dividend paid to the preferred shareholders in 2021 would be

a) $ 50,000.

b) $ 0.

c) $ 170,000.

d) $ 150,000.

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

130. The statement of retained earnings

a) reports the amount of dividends declared.

b) reports the amount of dividends paid.

c) reports the date dividends were declared.

d) does not report dividends.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

131. The following information is available for Mobily Corporation.
Retained earnings beginning balance $ 105,000
Dividends paid during the year $ 167,000
Cash dividends declared $ 67,000
Revenue $ 100,000
Expenses $ 73,000
What is the ending retained earnings balance?

a) $ 38,000

b) $ 65,000

c) $ 132,000

d) $ 145,000

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

132. What is the closing entry required for cash dividends?

a) Cash Dividends
Retained Earnings

b) Retained Earnings
Cash Dividends

c) Income Summary
Cash Dividends

d) Cash Dividend
Income Summary

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

133. Which one of the following is NOT necessary in order for a corporation to pay a cash dividend?

a) adequate cash

b) approval of shareholders

c) declaration of dividends by the board of directors

d) retained earnings

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

134. A distribution of a corporation’s profit to its shareholders is referred to as

a) a shareholder bonus.

b) wages and salaries expense.

c) a share distribution.

d) a dividend.

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

135. The date on which a cash dividend becomes a binding legal obligation is on the

a) declaration date.

b) date of record.

c) payment date.

d) last day of the fiscal year end.

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

136. The effect of the declaration of a cash dividend by the board of directors is to
Increase Decrease

a) Shareholders' equity Assets

b) Assets Liabilities

c) Liabilities Shareholders' equity

d) Liabilities Assets

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

137. The date at which ownership is determined for the purpose of determining who should receive a dividend is the

a) declaration date.

b) record date.

c) payment date.

d) ownership date.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

138. Dividends are declared out of

a) Contributed Capital.

b) Preferred Shares.

c) Common Shares.

d) Retained Earnings.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

139. On the dividend’s date of record

a) a dividend becomes a current obligation.

b) no entry is required.

c) an entry may be required if there has been a change in shareholders since the last dividend declaration.

d) Dividends Payable is debited.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

140. Dividends Payable is classified as a

a) non-current liability.

b) contra shareholders' equity account to retained earnings.

c) current liability.

d) non-operating expense.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

141. Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:
Total Assets Total Liabilities Total Shareholders' Equity

a) Increase Decrease No change

b) No change Increase Decrease

c) Decrease Increase Decrease

d) Decrease No change Increase

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

142. Which of the following statements about dividends is NOT accurate?

a) Many companies declare and pay cash quarterly dividends.

b) Low dividends may mean high investment returns.

c) The board of directors is obligated to declare dividends.

d) A legal dividend may not be a feasible one.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

143. DEN, Inc. has 1,000, $ 6, cumulative preferred shares issued at $ 100, and 50,000 common shares issued at $ 1, at December 31, 2021. What is the annual dividend on the preferred shares?

a) $ 60 per share

b) $ 6,000 in total

c) $ 600 in total

d) $ 0.60 per share

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

144. Kean’s Pumping, Inc. has 20,000, $ 4, cumulative preferred shares issued at $ 150, and 100,000 common shares issued at $ 1, at December 31, 2021. If the board of directors declares a $ 60,000 dividend, the

a) preferred shareholders will receive 1/10th of what the common shareholders will receive.

b) preferred shareholders will receive the entire $ 60,000.

c) $ 60,000 will be held as restricted retained earnings and paid out at some future date.

d) preferred shareholders will receive $ 30,000 and the common shareholders will receive $ 30,000.

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

145. Singh, Inc. has 5,000, $ 8, noncumulative preferred shares issued at $ 100, and 20,000 common shares issued at $ 1, at December 31, 2021. There were no dividends declared in 2020. The board of directors declares and pays a $ 60,000 dividend in 2021. What is the amount of dividends received by the common shareholders in 2021?

a) $ 0

b) $ 40,000

c) $ 60,000

d) $ 20,000

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

146. Assume that Company A is doing quite well and has healthy cash flows from operating activities. Its board of directors has decided to NOT pay any dividends to its shareholders for the foreseeable future. This is most likely because

a) the company wishes to reinvest its cash for future growth opportunities.

b) it would increase the company’s debt to equity ratio.

c) it would reduce retained earnings.

d) because it would cause a mass selloff of the company’s shares.

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

147. Accounting entries are required for dividends on which of the following two dates?

a) date of declaration and the date of record

b) date of record and the date of payment

c) date of declaration and the date of payment

d) date of record and the date of declaration

Difficulty: Easy

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

CPA: Financial Reporting

AACSB: Analytic

148. Ursula Company declared dividends of $ 20,000 in fiscal 2021 and paid the $ 42,000 dividends that were declared in fiscal 2020. Ursula paid the 2021 dividends in early fiscal 2022. Which of the following journal entries would NOT be recorded in fiscal 2021?

a) debit to Cash Dividends and credit to Dividends Payable for $ 20,000

b) debit to Dividends Payable and credit to Cash for $ 42,000

c) debit to Retained Earnings and credit to Cash Dividends for $ 20,000

d) debit to Dividends Payable and credit to Cash for $ 20,000

Difficulty: Medium

Learning Objective: Explain and demonstrate the accounting for cash dividends.

Section Reference: Cash Dividends

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

149. Retained earnings

a) is unique to the corporate form of business.

b) is an optional account in the partnership form of business.

c) reflects cash paid in by shareholders to date.

d) is closed at the end of the year.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

150. Retained earnings are

a) always equal to the amount of cash that the corporation has generated from operations.

b) a part of the contributed capital of the corporation.

c) a part of the shareholders' claim on the total assets of the corporation.

d) closed at the end of each accounting period.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

151. Tantramar Corporation has the following shareholders equity on July 31, 2020:
Shareholders' equity
Share capital
$ 10 preferred shares, cumulative
10,000 shares authorized, 5,000 shares issued $ 2,000,000
Common shares,
600,000 shares authorized, 10,000 shares issued 300,000
Total share capital 2,300,000
Retained earnings 500,000
Total shareholders’ equity $ 2,800,000

Assume that during the following year the company had profit of $ 65,000 and declared and paid dividends of $ 15,000. The beginning balance of retained earnings on the statement of retained earnings for the year ended July 31, 2021 is

a) $ 500,000.

b) $ 565,000.

c) $ 550,000.

d) cannot be determined from the information provided.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

152. Tantramar Corporation has the following shareholders equity on July 31, 2020:
Shareholders' equity
Share capital
$ 10 preferred shares, cumulative
10,000 shares authorized, 5,000 shares issued $ 2,000,000
Common shares,
600,000 shares authorized, 10,000 shares issued 300,000
Total share capital 2,300,000
Retained earnings 500,000
Total shareholders’ equity $ 2,800,000

Assume that on June 15, 2021, Tantramar paid the preferred dividend for the current year (there were no dividends in arrears) and paid a dividend of $ 2 to each common shareholder. The company earned $ 45,000 in profit during 2021. The July 31, 2021 financial statements will show an ending balance in retained earnings of

a) $ 500,000.

b) $ 545,000.

c) $ 475,000.

d) $ 430,000.

Difficulty: Medium

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

153. Income statements for corporations are the same as the income statements for proprietorships EXCEPT for the reporting of

a) cost of goods sold.

b) income taxes.

c) gross profit.

d) other revenues and other expenses.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

154. Corporation income tax expense is

a) usually accrued in the adjusting entry process.

b) not usually accrued because it is not known what the exact liability will be until the tax return is filed.

c) not reported in a separate section of a corporate income statement.

d) calculated using profit before income taxes in the previous fiscal year.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

155. A credit balance in retained earnings represents

a) the amount of cash retained in the business.

b) a claim on specific assets of the corporation.

c) earnings retained for future use.

d) the amount of shareholders' equity exempted from the shareholders' claim on total assets.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

156. The statement of retained earnings

a) is required as part of the financial statements under ASPE.

b) will show income taxes paid during the year.

c) will never show losses.

d) will, in some cases, fail to reconcile the beginning and ending retained earnings balances.

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

157. Which of the following is NOT a component of the statement of retained earnings?

a) net income

b) dividends

c) beginning balance of retained earnings

d) preferred shares

Difficulty: Easy

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation.

Section Reference: Reporting Retained Earnings

CPA: Financial Reporting

AACSB: Analytic

158. Two classifications appearing in the contributed capital section of the balance sheet are

a) preferred shares and common shares.

b) contributed capital and retained earnings.

c) share capital and contributed surplus.

d) share capital and retained earnings.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

159. Private companies following ASPE are required to disclose for each class of shares, the

a) the market value per share.

b) the present value per share.

c) number of shares authorized.

d) number of shares issued.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

160. Return on equity is a ratio generally used to evaluate

a) liquidity.

b) solvency.

c) profitability.

d) all of the above

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

161. Return on equity

a) is used by management to evaluate liquidity.

b) calculates the rate of return shareholders are earning on their investment.

c) represents the equity a common shareholder has in net assets of the corporation.

d) is calculated by taking profit divided by this year’s shareholders’ equity.

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

162. Profit for Sandos Inc., was $ 10,000 in 2021. Shareholders’ equity was $ 100,000 at December 31 2019, $ 200,000 at December 31, 2020, and $ 300,000 at December 31, 2021. Return on equity for 2021 is

a) 5%.

b) 4%.

c) 3.3%.

d) 10%.

Difficulty: Medium

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

163. Which of the following terms represents a situation in which total losses and dividends to date are greater than total profit to date?

a) net income

b) deficit

c) profit

d) net loss

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

164. Which of the following is NOT considered a classification of contributed capital on the balance sheet?

a) common shares

b) contributed surplus

c) retained earnings

d) preferred shares

Difficulty: Easy

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.

Section Reference: Statement Presentation and Analysis

CPA: Financial Reporting

AACSB: Analytic

MATCHING QUESTIONs

165. Match the items below by entering the appropriate code letter in the space provided.

A. Authorized shares F. Noncumulative feature

B. Dividends G. Issued shares

C. Redeemable Preferred Shares H. Declaration date

D. Share capital I. Return on equity

E. Retained earnings J. Cumulative feature

___ 1. Total number of each class of shares a corporation is allowed to sell.

___ 2. A distribution of cash or shares by a corporation to its shareholders on a pro rata basis

___ 3. The number of shares that have been sold by the corporation.

___ 4. Preferred shareholders have a right to receive current and unpaid prior-year dividends before common shareholders receive any dividends.

___ 5. Allow the issuing corporation to buy back its own shares at specified future dates and prices.

___ 6. In a year when dividends are NOT declared, dividends for that year are lost to shareholders.

___ 7. Profit retained in the corporation

___ 8. The date when the board of directors formally declares a dividend and announces it to the shareholders.

___ 9. Ratio used to measure a firm’s profitability and efficiency

___ 10. Amount paid or contributed to the corporation by a shareholder in exchange of shares of ownership.