BUS103: Introduction to Financial Accounting

True-false

1. False. This is not the primary reason a person may prefer the corporate form of business organization in a situation involving considerable risk. The primary reason is that stockholders can lose only the amount of capital they have invested in a corporation.

2. False. The claims of the creditors rank ahead of the claims of the stockholders, even those stockholders whose stock is preferred as to assets.

3. True. Par value is simply the amount per share that is credited to the Capital Stock account for each share issued and is no indication of the market value or the book value of the stock.

4. True. When capital stock is issued for property or services, the transaction is recorded at the fair market value of (1) the property or services received or (2) the stock issued, whichever is more clearly evident.

Multiple-choice

1. c. This feature of corporations is one of the disadvantages of the corporate form of organization.

2. b. Stated value is an arbitrary amount assigned by the board of directors to each share of capital stock without a par value.

3. d. Dividends in arrears are cumulative unpaid dividends. Only cumulative preferred stock has dividends in arrears.

4. b. The amount credited to the Paid-In Capital in Excess of Par Value – Common is computed as follows:

5. a. The book value of common stock is computed as follows: