Correct. Rita will need to pay taxes on her $40,000 compensation and on the $40,000 she receives as her third of the $120,000 remaining partnership income. Rita's third was calculated by taking her investment of $20,000 and dividing it by the total invested of $60,000. Individual taxes on a total of $80,000 of income at her 25% tax rate would be $20,000 leaving Rita with $60,000 after tax.

2. b

Correct. If the business is a corporation the salary will be an expense and net income will be $120,000 ($160,000 - $40,000). Tax on the first $100,000 is 10% or $10,000. Tax on the $20,000 remaining is at 15% or $3,000. Total tax is $13,000 so the income after tax would be $120,000 - $13,000 = $107,000.

3. a.

Correct. Rita will have to show income of $40,000 from the salary and also one third ($20,000 ¸ $60,000) of the business income of $98,000 or $32,667 for total income of $72,667. Taxes at 25% of $72,667 are $54,500.

4. b.

Correct. This is the definition of the term double taxation.

5. d.

Correct. The corporation, because the stock is cumulative would have to pay the previous two years dividends on the preferred stock first. Next, because preferred gets dividends before common, the preferred dividend would have to be paid for the current year. The preferred stock would therefore get three years of dividends. Calculation of the dividend would be $50 par ´ 8% ´ 7,800 outstanding shares ´ 3 years = $93,600.

6. a.

Correct. The corporation is authorizes to issue 10,000 shares but has only issued 7,800 shares to date. They can still issue 2,200 (10,000 - 7,800) additional shares without further authorization.

7. b.

Correct. Shareholders paid a total amount of $429,000 for the shares of stock. This amount when divided by the number of issued shares of 7,800 gives you $55 per share.

8. d.

Correct. This is the false statement. The majority of businesses in the United States are sole proprietorships.

9. b.

Correct. This is the false statement. In fact the term cumulative means that past years preferred dividends not paid will accumulate and must be paid before any current dividends to any stock. Preferred stock will always receive the current dividend before common even if the stock is noncumulative.

10. a.

Correct. This is the false statement. The dollar amount shown in common stock is calculated by multiplying the number of shares ISSUED times the par value per share.

11. b.

Correct. This is the false statement. Dividends are paid based on the number of shares OUTSTANDING.

12. b.

Correct. Stockholders equity increased during the year because the company issued stock in the amount of $75,000 (5,000 @ $15), made a net income of $45,000 and decreased by $30,000 due to a dividend for a net increase during the period of $90,000 ($75,000 + $45,000 – $30,000). Add this increase to beginning equity of $520,000 and you get $610,000. Average equity is ($520,000 + $610,000) ¸ 2 or $565,000. Return on equity is calculated by dividing net income of $45,000 by average equity of $565,000 for 7.96%.