An owner of common stock will not have any liability beyond actual investment if the owner

a. Paid less than par value for stock purchased in

connection with an original issue of shares.

b. Agreed to perform future services for the corporation in exchange for original issue par value shares.

c. Purchased treasury shares for less than par value.

d. Failed to pay the full amount owed on a subscription contract for no-par shares.

24. In general, which of the following statements concerning treasury stock is correct?

a. A corporation may not reacquire its own stock unless specifically authorized by its articles of incorporation.

b. On issuance of new stock, a corporation has pre-emptive rights with regard to its treasury stock.

c. Treasury stock may be distributed as a stock dividend.

d. A corporation is entitled to receive cash dividends on its treasury stock.

25. Ambrose purchased 400 shares of $100 par value original issue common stock from Minor Corporation for $25 a share. Ambrose subsequently sold 200 of the shares to Harris at $25 a share. Harris did not have knowledge or notice that Ambrose had not paid par. Ambrose also sold 100 shares of this stock to Gable for $25 a share. At the time of this sale, Gable knew that Ambrose had not paid par for the stock.

Minor Corporation became insolvent and the creditors sought to hold all the above parties liable for the $75 unpaid on each of the 400 shares. Under these circumstances

a. The creditors can hold Ambrose liable for

$30,000.

b. If $25 a share was a fair value for the stock at the time of issuance, Ambrose will have no liability to the creditors.

c. Since Harris acquired the shares by purchase, he is not liable to the creditors, and his lack of knowledge or notice that Ambrose paid less than par is immaterial.

d. Since Gable acquired the shares by purchase, he is not liable to the creditors, and the fact that he knew Ambrose paid less than par is immaterial.

26. Which of the following rights is a holder of a public corporation’s cumulative preferred stock always entitled to?

a. Conversion of the preferred stock into common stock.

b. Voting rights.

c. Dividend carryovers from years in which dividends were not paid, to future years.

d. Guaranteed dividends.

27. West owns 5,000 shares of $7 cumulative preferred stock of Sky Corp. During the first year of operations, cash dividends of $7 per share were declared on Sky’s preferred stock but were never paid. In the second year of operations, dividends on Sky’s preferred stock were neither declared nor paid.

If Sky is dissolved, which of the following statements is correct?

a. West will have priority over the claims of Sky’s debenture bond owners.

b. West will have priority over the claims of Sky’s unsecured judgment creditors.

c. Sky will be liable to West as an unsecured creditor for $35,000.

d. Sky will be liable to West as an unsecured creditor for $70,000.

28. Johns owns 400 shares of Abco Corp. cumulative preferred stock. In the absence of any specific contrary provisions in Abco’s articles of incorporation, which of the following statements is correct?

a. Johns is entitled to convert the 400 shares of preferred stock to a like number of shares of common stock.

b. If Abco declares a cash dividend on its preferred stock, Johns becomes an unsecured creditor of Abco.

c. If Abco declares a dividend on its common stock, Johns will be entitled to participate with the common stock shareholders in any dividend distribution made after preferred dividends are paid.

d. Johns will be entitled to vote if dividend payments are in arrears.

29. Price owns 2,000 shares of Universal Corp.’s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid.

In the second year, dividends on the preferred stock were neither declared nor paid. If Universal is dissolved, which of the following statements is correct?

a. Universal will be liable to Price as an unsecured creditor for $10,000.

b. Universal will be liable to Price as a secured creditor for $20,000.

c. Price will have priority over the claims of Universal’s bond owners.

d. Price will have priority over the claims of Universal’s unsecured judgment creditors.

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

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.

31. All of the following distributions to stockholders are considered asset or capital distributions, except a. Liquidating dividends.

b. Stock splits.

c. Property distributions.

d. Cash dividends.

32. Jane Cox, a shareholder of Mix Corp., has properly commenced a derivative action against Mix’s Board of Directors. Cox alleges that the Board breached its fiduciary duty and was negligent by failing to independently verify the financial statements prepared by management upon which Smart & Co., CPAs, issued an unqualified opinion.

The financial statements contained inaccurate information which the Board relied upon in committing large sums of money to capital expansion. This resulted in Mix having to borrow money at extremely high interest rates to meet current cash needs. Within a short period of time, the price of Mix Corp. stock declined drastically. Which of the following statements is correct?

2Q-4

a. The Board is strictly liable, regardless of fault, since it owes a fiduciary duty to both the corporation and the shareholders.

b. The Board is liable since any negligence of Smart is automatically imputed to the Board.

c. The Board may avoid liability if it acted in good faith and in a reasonable manner.

d. The Board may avoid liability in all cases where it can show that it lacked scienter.

33. Generally, officers of a corporation a. Are elected by the shareholders.

b. Are agents and fiduciaries of the corporation, having actual and apparent authority to manage the business.

c. May be removed by the board of directors without cause only if the removal is approved by a majority vote of the shareholders.

d. May declare dividends or other distributions to shareholders as they deem appropriate.

34. Under the Revised Model Business Corporation Act, a corporate director is authorized to

a. Rely on information provided by the appropriate corporate officer.

b. Serve on the board of directors of a competing business.

c. Sell control of the corporation.

d. Profit from insider information.

35. Knox, president of Quick Corp., contracted with Tine Office Supplies, Inc., to supply Quick’s stationery on customary terms and at a cost less than that charged by any other suppliers. Knox later informed Quick’s board of directors that Knox was a majority stockholder in Tine. Quick’s contract with Tine is

a. Void because of Knox’s self-dealing.

b. Void because the disclosure was made after execution of the contract.

c. Valid because of Knox’s full disclosure.

d. Valid because the contract is fair to Quick.

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

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

b. A corporation may be authorized to indemnify its officers for liability incurred in a suit by stockholders.

c. Stockholders always have the right to elect a corporation’s officers.

d. An officer of a corporation is required to own at least one share of the corporation’s stock.

37. Which of the following must take place for a corporation to be voluntarily dissolved?

a. Passage by the board of directors of a resolution to dissolve.

b. Approval by the officers of a resolution to dissolve.

c. Amendment of the certificate of incorporation.

d. Unanimous vote of the stockholders.

38. Which of the following would be grounds for the judicial dissolution of a corporation on the petition of a shareholder?

a. Refusal of the board of directors to declare a dividend.

b. Waste of corporate assets by the board of directors.

c. Loss operations of the corporation for three years.

d. Failure by the corporation to file its federal income tax returns.

S CORPORATIONS

39. Which one of the following will render a corporation ineligible for S corporation status?

a. One of the stockholders is a decedent's estate.

b. One of the stockholders is a bankruptcy estate.

c. The corporation has both voting and nonvoting common stock issued and outstanding.

d. The corporation has 105 stockholders.

40. Which of the following conditions will prevent a corporation from qualifying as an S Corporation?

a. The corporation has both common and preferred stock.

b. The corporation has one class of stock with different voting rights.

c. One shareholder is an estate.

d. One shareholder is a grantor trust.

41. Village Corp., a calendar year corporation, began business in 1990. Village made a valid S Corporation election on December 5, 2003, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout 2004. On what date did Village's S status become effective?

a. January 1, 2003.

b. January 1, 2004.

c. December 5, 2003.

d. December 5, 2004.

42. On February 10, 2003, Ace Corp., a calendar year corporation, elected S corporation status and all shareholders consented to the election. There was no change in shareholders in 2003. Ace met all eligibility requirements for S status during the preelection portion of the year. What is the earliest date on which Ace can be recognized as an S