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Financial Structure, Capitalization, Profit and Loss Allocation, and Distributions

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Business Structure (Selection of a Business Entity

Business Structure (Selection of a Business Entity

Question 1 of 13

1

Which of the following decreases stockholder equity?

Select one of the following:

  • A. Investments by owners

  • B. Distributions to owners

  • C. Issuance of stock

  • Acquisition of assets in a cash transaction

Explanation

Question 2 of 13

1

Lewis, Clark, and Beal entered into a written agreement to form a partnership. The agreement required that the partners make the following capital contributions: Lewis, $40,000; Clark, $30,000; and Beal, $10,000. It was also agreed that, in the event the partnership experienced losses in excess of available capital, Beal would contribute additional capital to the extent of the losses. The partnership agreement was otherwise silent about division of profits and losses. Which of the following statements is correct?

Select one of the following:

  • A. Profits are to be divided among the partners in proportion to their relative capital contributions.

  • B. Profits are to be divided equally among the partners.

  • C. Losses will be allocated in a manner different from the allocation of profits because the partners contributed different amounts of capital.

  • D. Beal's obligation to contribute to additional capital would have an effect on the allocation of profit or loss to Beal.

Explanation

Question 3 of 13

1

If no provisions are made in an agreement, a general partnership allocates profits and losses based on the:

Select one of the following:

  • A. value of actual contributions made by each partner.

  • B. number of partners.

  • C. number of hours each partner worked in the partnership during the year.

  • D. number of years each partner belonged to the partnership.

Explanation

Question 4 of 13

1

Which of the following statements is regarding the declaration of a stock dividend by a corporation having only one class of par value stock?

Select one of the following:

  • A. A stock dividend has the same legal and practical significance as a stock split.

  • B. A stock dividend increases a stockholder's proportionate share of corporate ownership.

  • C. A stock dividend causes a decrease in the assets of the corporation.

  • D. A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders.

Explanation

Question 5 of 13

1

Which of the following statements is regarding the division of profits in a general partnership when the written partnership agreement only provides that losses be divided equally among the partners? Profits are to be divided:

Select one of the following:

  • A. based on the partners' ratio of contribution to the partnership.

  • B. based on the partners' participation in day-to-day management.

  • C. equally among the partners.

  • D. proportionately among the partners.

Explanation

Question 6 of 13

1

The stock of Crandall Corporation is regularly traded over the counter. However, 75% is owned by the founding family and a few of the key executive officers. It has had a cash dividend record of paying out annually less than 5% of its earnings and profits over the past 10 years. It has, however, declared a 10% stock dividend during each of these years. Its accumulated earnings and profits are beyond the reasonable current and anticipated needs of the business. Which of the following is ?

Select one of the following:

  • A. The shareholders can compel the declaration of a dividend only if the directors’ dividend policy is fraudulent.

  • B. The Internal Revenue Service cannot attack the accumulation of earnings and profits since the Code exempts publicly held corporations from the accumulations provisions.

  • C. The fact that the corporation was paying a 10% stock dividend, apparently in lieu of a cash distribution, is irrelevant insofar as the ability of the Internal Revenue Service to successfully attack the accumulation.

  • D. Either the Internal Revenue Service or the shareholders could successfully obtain a court order to compel the distribution of earnings and profits unreasonably accumulated.

Explanation

Question 7 of 13

1

Carr Corp. declared a 7% stock dividend on its common stock. The dividend:

Select one of the following:

  • A. must be registered with the SEC pursuant to the Securities Act of 1933.

  • B. is includable in the gross income of the recipient taxpayers in the year of receipt.

  • C. has no effect on Carr's earnings and profits for federal income tax purposes.

  • D. requires a vote of Carr's stockholders.

Explanation

Question 8 of 13

1

Unless prohibited by the organization documents, a stockholder in a publicly held corporation and the owner of a limited partnership interest both have the right to:

Select one of the following:

  • A. ownership of the business' assets.

  • B. control management of the business.

  • C. assign their interest in the business.

  • D. an investment that has perpetual life.

Explanation

Question 9 of 13

1

Which of the following statements is regarding both debt and common shares of a corporation?

Select one of the following:

  • A. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.

  • B. Common shareholders and debt holders have an ownership interest in the corporation.

  • C. Common shares typically have a fixed maturity date, but debt does not.

  • D. Common shares have a higher priority on liquidation than debt.

Explanation

Question 10 of 13

1

Berry, Drake, and Flanigan are partners in a general partnership. The partners made capital contributions as follows: Berry, $150,000; Drake, $100,000; and Flanigan, $50,000. Drake made a loan of $50,000 to the partnership. The partnership agreement specifies that Flanigan will receive a 50% share of profits, and Drake and Berry each will receive a 25% share of profits. Under the Revised Uniform Partnership Act and in the absence of any partnership agreement to the contrary, which of the following statements is regarding the sharing of losses?

Select one of the following:

  • A. The partners will share equally in any partnership losses.

  • B. The partners will share in losses on a pro rata basis according to the capital contributions.

  • C. The partners will share in losses on a pro rata basis according to the capital contributions and loans made to the partnership.

  • D. The partners will share in losses according to the allocation of profits specified in the partnership agreement.

Explanation

Question 11 of 13

1

Under the Revised Model Business Corporation Act, which of the following dividends is not defined as a distribution?

Select one of the following:

  • A. Cash dividends

  • B. Property dividends

  • C. Liquidating dividends

  • D. Stock dividends

Explanation

Question 12 of 13

1

Opal Corp. declared a 9% stock dividend on its common stock. The dividend:

Select one of the following:

  • A. requires a vote of Opal's stockholders.

  • B. has no effect on Opal's earnings and profits for federal income tax purposes.

  • C. is includable in the gross income of the recipient taxpayers in the year of receipt.

  • D. must be registered with the SEC pursuant to the Securities Act of 1933.

Explanation

Question 13 of 13

1

Under the Revised Model Business Corporation Act, which of the following statements is regarding corporate officers of a public corporation?

Select one of the following:

  • C. Stockholders always have the right to elect a corporation's officers.

  • B. A corporation may be authorized to indemnify its officers for liability incurred in a suit of stockholders.

  • D. An officer of a corporation is required to own at least one share of the corporation's stock.

  • A. An officer may not simultaneously serve as a director.

Explanation

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