Test Bank Introduction To Corporations Mutiple Choice Ch.13

CHAPTER 13

INTRODUCTION TO CORPORATIONS

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES
AND BLOOM’S TAXONOMY

Note: K = Knowledge C = Comprehension AP = Application

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

SUMMARY OF QUESTIONS BY LEVEL OF DIFFICULTY (LOD)

Note: E = Easy M = Medium H=Hard

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 shares carries different rights and privileges. The rights of common share owners 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. Account 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 many 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 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 reported in a separate section before profit in the corporation’s income statement.

4. Account 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).

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 account 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: share capital and additional 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.

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

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

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

5. A privately held corporation can also be a publicly accountable enterprise if it has bonds that are publically held.

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

7. Acts of the shareholders who are not official agents of a corporation can legally bind a corporation.

8. Creditors have access to corporate assets only to have their claims repaid by them.

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

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

11. Organization costs are normally capitalized by public companies.

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

13. The Board of Directors of a corporation legally owns the corporation.

14. Companies incorporated in the province of Ontario will be incorporated under the Canada Business Corporations Act.

15. Companies can only be incorporated under a federal basis.

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

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

18. Corporations must pay taxes as a legal entity.

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

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

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

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

23. The authorization of share capital does not result in a formal accounting entry.

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

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

26. No par value shares are shares that have not been assigned any specific value.

27. When shares are issued for services or non-cash assets, the shares should be recorded at the fair value of the services or noncash assets.

28. 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.

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

30. 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.

31. Common shares usually have a cumulative dividend feature.

32. A corporation must have preferred shares.

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

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

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

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

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

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

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

40. Income tax expense must be added on the income statement when determining profit.

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

42. Income taxes only affect the income statement.

43. Companies have one year after their fiscal year end to submit their corporate tax return without incurring penalties.

44. Corporate income tax is based on the amount of Retained Earnings that a company has.

45. Dividends in arrears are not considered a liability.

46. There is no obligation to pay dividends until a dividend is declared by the Board of Directors.

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

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

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

50. Retained earnings is a temporary account.

51. A cash dividend account is never closed during the closing process.

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

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

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

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

56. Dividends are distributed from retained earnings.

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

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

59. If the board of directors has not declared a dividend then no liability exists.

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

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

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

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

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

65. Under IFRS, there is a section in Shareholders Equity on the balance sheet called accumulated other comprehensive income.

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

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

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

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

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

70. The dominant form of business organization in Canada is

a. the proprietorship.

b. the partnership.

c. the corporation.

d. not known.

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

a. not-for-profit corporation.

b. publicly held corporation.

c. privately held corporation.

d. partnership.

72. 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.

73. 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

74. 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.

75. 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

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

a. Partnership

b. Proprietorship

c. Corporation

d. Limited partnership

77. 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.

78. 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.

79. 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.

80. 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.

81. Allen Barron has invested $800,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Barron 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

82. 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.

83. 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.

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

a. legal fees.

b. accounting fees.

c. directors’ fees.

d. registration costs.

85. 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.

86. 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.

87. Which of the following statements is INCORRECT with regards to Federal and Provincial laws?

a. They control the sale of share capital to the general public.

b. They specify the requirements for issuing shares.

c. They specify the requirements for distributing profit to shareholders.

d. They specify the requirements for reacquiring shares.

88. 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

89. 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.

90. 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

91. 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.

92. 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.

93. 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.

94. The purchase of a company’s shares on the TSX 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.

95. 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.

96. 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

97. 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.

98. 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.

99. 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.

100. If Visser 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.

101. Baden 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, Baden 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.

102. Southern Limited issued 2,000 common shares in payment of its lawyer's bill of $8,000. Southern 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.

103. 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.

Use the following information for questions 104–106.

Jacobs Corporation has the following shareholders’ equity on December 31, 2014:

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

104. 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

105. 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

106. What is the dividend amount payable to preferred shareholders in 2014 assuming no shares are converted?

a. $50,000

b. $900,000

c. $100,000

d. $500,000

107. 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

108. 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.

109. 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.

110. 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 recorded.

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

111. 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.

112. 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.

113. Tam 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

114. Tantramar Corporation has the following shareholders equity on July 31, 2013:

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 Tantramar can issue is

a. 10,000.

b. 610,000.

c. 600,000.

d. Cannot be determined from the information provided.

115. 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 or assets acquired or fair value of shares issued.

116. Corporations have a

a. limited life.

b. indefinite life.

c. limited legal life.

d. legal life of 20 years.

Use the following information for 117–118.

Orville Industries has the following account balances:

Retained earnings $75,000

Revenue $365,000

Operating Expenses $297,000

Interest Expense $ 17,500

117. 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

118. On the corporate income statement what will be the amount reported as “profit”?

a. $40,400

b. $36,900

c. $50,500

d. $60,000

119. What is the correct journal entry to adjust for the 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

120. Income tax expense is based on

a. profit from operations.

b. profit before income taxes.

c. retained earnings balance.

d. profit.

121. Dividends are declared out of

a. Common Shares.

b. Preferred Shares.

c. Retained Earnings.

d. Profit.

122. 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.

123. 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.

124. 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.

Use the following information for questions 125–127.

Norton Corporation has the following shareholders equity on September 30, 2014:

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, 2014, Norton Corporation declared a $170,000 dividend to be paid on October 15 to shareholders of record on September 30.

125. Assuming that the preferred dividends have not been paid since 2011, the amount of dividends per common share for 2014 would be

a. $17.

b. $2.

c. $0.10.

d. $10.

126. Assuming that the preferred dividends have not been paid since 2011, the total amount of the dividend paid to the preferred shareholders in 2014 would be

a. $50,000.

b. $0.

c. $170,000.

d. $150,000.

127. Assuming there were no dividends in arrears, the total amount of the dividend paid to the preferred shareholders in 2014 would be

a. $50,000.

b. $0.

c. $170,000.

d. $150,000.

128. 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.

129. 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

130. 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

131. 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

132. 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.

133. 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.

134. 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

135. 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.

136. Dividends are declared out of

a. Contributed Capital.

b. Preferred Shares.

c. Common Shares.

d. Retained Earnings.

137. 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.

138. 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.

139. 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

140. 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.

141. DEN, Inc. has 1,000, $6, cumulative preferred shares issued at $100, and 50,000 common shares issued at $1, at December 31, 2010. 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

142. 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, 2014. 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.

143. Singh, Inc. has 5,000, $8, noncumulative preferred shares issued at $100, and 20,000 common shares issued at $1, at December 31, 2014. There were no dividends declared in 2013. The board of directors declares and pays a $60,000 dividend in 2014. What is the amount of dividends received by the common shareholders in 2014?

a. $0

b. $40,000

c. $60,000

d. $20,000

144. Assume that company A is doing quite well and has healthy cash flow 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.

145. 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.

146. Retained earnings is

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.

Use the following information for questions 147–148.

Tantramar Corporation has the following shareholders equity on July 31, 2013:

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

147. 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, 2014 is

a. $500,000.

b. $565,000.

c. $550,000.

d. Cannot be determined from the information provided.

148. Assume that on June 15, 2014, 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 2014. The July 31, 2014 financial statements will show an ending balance in retained earnings of

a. $500,000.

b. $545,000.

c. $475,000.

d. $430,000.

149. 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.

150. 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.

151. 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. a claim on the aggregate assets of the corporation.

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

152. 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.

153. 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 additional contributed capital.

d. share capital and retained earnings.

154. 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.

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

a. liquidity.

b. solvency.

c. profitability.

d. all of the above.

e. none of the above.

156. 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.

157. Profit for Sandos Inc., was $10,000 in 2013. Shareholders’ equity was $100,000 at December 31 2011, $200,000 at December 31, 2012, and $300,000 at December 31, 2013. Return on equity for 2013 is

a. 5%.

b. 4%.

c. 3.3%.

d. 10%.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

MATCHING QUESTION

158. 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.

ANSWERS TO MATCHING QUESTION

158.

1. A

2. B

3. G

4. J

5. C

6. F

7. E

8. H

9. I

10. D

Legal Notice

Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.