Case Reading 3-5 Quiz

  1. Rita and Louise are opening a day care center. Rita contributed $20,000 and Louise contributed $40,000 to start the business. They are trying to decide whether to form a partnership or a corporation. Rita is the only owner who is working in the business and will receive yearly compensation (salary) of $40,000. The business has an income of $160,000 before any salary consideration for the owner. Listed below are the individual and corporate tax rates:

    2. Individual Income Tax Rates

    Corporate Tax Rates

    Rita

    25%

    First $100,000 of income: 10%

    Louise

    20%

    Income > $100,000: 15%

     

    Assume the business is a partnership. After compensating Rita for her work in the business, the remaining partnership net income will be distributed in the ratio of the partners’ original capital contribution. The total after-tax income (consider all income) to Rita is:

    a. $40,000

    b. $58,000

    c. $60,000

    d. $62,800

  2. Rita and Louise are opening a day care center. Rita contributed $20,000 and Louise contributed $40,000 to start the business. They are trying to decide whether to form a partnership or a corporation. Rita is the only owner who is working in the business and will receive yearly compensation (salary) of $40,000. The business has an income of $160,000 before any salary consideration for the owner. Listed below are the individual and corporate tax rates:

    3. Individual Income Tax Rates

    Corporate Tax Rates

    Rita

    25%

    First $100,000 of income: 10%

    Louise

    20%

    Income > $100,000: 15%

    Assume the business is a corporation. What would the corporation show as its after tax net income?

    a. $141,000

    b. $107,000

    c. $126,000

    d. $119,000

  3. Rita and Louise are opening a day care center. Rita contributed $20,000 and Louise contributed $40,000 to start a corporation. Rita is the only owner who is working in the business and will receive yearly compensation (salary) of $40,000. The after tax net income of the company is $98,000 and the entire net income is distributed to the shareholders as dividends in the ratio of their original capital investments. Listed below are the individual and corporate tax rates:

    4. Individual Income Tax Rates

    Corporate Tax Rates

    Rita

    25%

    First $100,000 of income: 10%

    Louise

    20%

    Income > $100,000: 15%

     

    What is the total amount of taxes that Rita would show on her personal income tax return related to the all the income she received from the corporation?

    a. $54,500

    b. $24,500

    c. $66,750

    d. $48,200

  4. The term double taxation means that:

    5. a. that owners who work in the business are taxed on their salary and on the dividends distributed to them.

    b. the corporation is first taxed on the corporate income and then the shareholders are taxed on the after tax income distributed as dividends.

    c. corporate tax rates are double the individual rates in the lower tax brackets.

    d. corporate tax rates are double the individual rates in the higher tax brackets.

  5. The 1999 balance sheet of the Braxton Company showed the following information related to preferred stock:

    6. Preferred Stock, $50 par, 8% cumulative, 10,000 shares authorized, 7,800 shares issued and outstanding

    $ 390,000

    Contributed Capital in Excess of Par

    39,000

    Total Capital Contributed by Preferred Stock

    $ 429,000

     

    If no dividends were declared in 1997 or 1998, what amount of dividends would the company have to pay in 1999 to its preferred shareholders before any dividends were paid to the common stock?

    a. $120,000

    b. $62,400

    c. $80,000

    d. $93,600

     

  6. The 1999 balance sheet of the Braxton Company showed the following information related to preferred stock:

    7. Preferred Stock, $50 par, 8% cumulative, 10,000 shares authorized, 7,800 shares issued and outstanding

    $ 390,000

    Contributed Capital in Excess of Par

    39,000

    Total Capital Contributed by Preferred Stock

    $ 429,000

    How many additional shares of preferred stock can the company issue without further approval?

    a. 2,200

    b. 10,000

    c. 7,800

    d. Cannot determine from information given

  7. The 1999 balance sheet of the Braxton Company showed the following information related to preferred stock:

    8. Preferred Stock, $50 par, 8% cumulative, 10,000 shares authorized, 7,800 shares issued and outstanding

    $ 390,000

    Contributed Capital in Excess of Par

    39,000

    Total Capital Contributed by Preferred Stock

    $ 429,000

    Approximately, what was the average issuance price for a share of preferred stock?

    a. $50.00 per share

    b. $55.00 per share

    c. $5.00 per share

    d. $42.90 per share

  8. Which of the following statements is false?

    9. a.

    The entity principle states that, for accounting purposes, all types of business organizations are considered to be entities, separate and distinct from their owners.

    b.

    business income of a partnership is recorded on Schedule C of the owners' 1040 income tax return.

    c.

    the easiest form of business to establish is a sole proprietorship.

    d.

    the majority of businesses in the U.S. are corporations.

  9. Which of the following statements regarding preferred stock is false?

    10. a.

    Preferred stock is preferred in the event of liquidation.

    b.

    The term cumulative as it pertains to preferred stock means that preferred shareholders receive dividends before the common shareholders.

    c.

    Preferred stockholders usually have limited voting rights.

    d.

    Undeclared previous years' dividends on preferred stock are called dividends in arrears.

  10. Which of the following statements regarding common stock is false?

    11. a.

    The dollar amount shown in common stock is calculated by multiplying the number of shares outstanding times the par value per share.

    b.

    Par value is an arbitrary amount having no relationship to the market value of the share of stock.

    c.

    Shares of common stock which the company repurchases are called treasury shares.

    d.

    The number of outstanding shares can be calculated by subtracting the treasury shares from the issued shares.

  11. Which of the following statements regarding dividends is false?

    12. a.

    Dividends can be paid on both preferred and common stock.

    b.

    Dividends are paid based on the number of shares issued.

    c.

    The term noncumulative as it pertains to preferred stock means that if a dividend is not declared in the current year, the shareholders lose their rights to that dividend forever.

    d.

    If a cash dividend is declared and paid on the same day, the cash dividend would be recorded on the accounting transaction worksheet as a reduction in cash and a reduction in retained earnings.

  12. A corporation had beginning stockholders equity of $520,000. During the year, the company issued 5,000 shares of $10 par common stock at $15 per share, had net income of $45,000, and paid a dividend of $30,000 to shareholders. The return on stockholders' equity for the year is:

a. 8.14%

b. 7.96%

c. 8.53%

d. 7.46%