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The residual interest in a corporation

21.The residual interest in a corporation belongs to the

a. management.

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b. creditors.

c. common stockholders.

d. preferred stockholders.

22. The pre-emptive right of a common stockholder is the right to

a. share proportionately in corporate assets upon liquidation.

b. share proportionately in any new issues of stock of the same class.

c. receive cash dividends before they are distributed to preferred stockholders.

d. exclude preferred stockholders from voting rights.

23. The pre-emptive right enables a stockholder to

a. share proportionately in any new issues of stock of the same class.

b. receive cash dividends before other classes of stock without the pre-emptive right.

c. sell capital stock back to the corporation at the option of the stockholder.

d. receive the same amount of dividends on a percentage basis as the preferred stockholders.

24. In a corporate form of business organization, legal capital is best defined as

a. the amount of capital the state of incorporation allows the company to accumulate over its existence.

b. the par value of all capital stock issued.

c. the amount of capital the federal government allows a corporation to generate.

d. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.


25. Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders

a. are entitled to a dividend every year in which the business earns a profit.

b. have the rights to specific assets of the business.

c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.

d. can negotiate individual contracts on behalf of the enterprise.

26. Total stockholders’ equity represents

a. a claim to specific assets contributed by the owners.

b. the maximum amount that can be borrowed by the enterprise.

c. a claim against a portion of the total assets of an enterprise.

d. only the amount of earnings that have been retained in the business.

27. A primary source of stockholders’ equity is

a. income retained by the corporation.

b. appropriated retained earnings.

c. contributions by stockholders.

d. both income retained by the corporation and contributions by stockholders.

28. Stockholders’ equity is generally classified into two major categories:

a. contributed capital and appropriated capital.

b. appropriated capital and retained earnings.

c. retained earnings and unappropriated capital.

d. earned capital and contributed capital.

29. The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the

a. pro forma method.

b. proportional method.

c. incremental method.

d. either the proportional method or the incremental method.

30. When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

a. market value of the services received.

b. par value of the shares issued.

c. market value of the shares issued.

d. Any of these provides an appropriate basis for recording the transaction.

31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as

1. a reduction of additional paid-in capital.

2. an expense of the period in which the stock is issued.

3. an intangible asset.

a. 1

b. 2

c. 3

d. 1 or 3


32. A “secret reserve” will be created if

a. inadequate depreciation is charged to income.

b. a capital expenditure is charged to expense. residual interest

c. liabilities are understated. residual interest

d. stockholders’ equity is overstated. residual interest

33. Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?

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