Chapter 39 Corporate Formation and Financing. All Answers

N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N A question new to this edition of the Test Bank. + A question modified from the previous edition of the Test Bank. = A question inc ...

N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows. N A question new to this edition of the Test Bank. + A question modified from the previous edition of the Test Bank. = A question included in the previous edition of the Test Bank. TRUE/FALSE QUESTIONS A1. A corporation is a legal entity created and recognized by federal law. F PAGE: 753 TYPE: N NAT: AACSB Analytic AICPA Legal A2. Corporate profits can be subject to double taxation. T PAGE: 754 TYPE: N NAT: AACSB Analytic AICPA Legal A3. A holding company is a company whose business activity consists of holding shares in another company. T PAGE: 754 TYPE: N NAT: AACSB Analytic AICPA Legal A4. A corporation cannot be held liable for the criminal acts of its employees. F PAGE: 754 TYPE: N NAT: AACSB Analytic AICPA Legal A5. A corporation whose shares are not publicly traded is a partnership. F PAGE: 756 TYPE: N NAT: AACSB Analytic AICPA Legal A6. A corporation formed in another country but doing business in the United States is referred to in the United States as an alien corporation. T PAGE: 756 TYPE: N NAT: AACSB Analytic AICPA Legal A7. An agreement between shareholders to restrict the transfer of a closely held corporation’s stock is illegal. F PAGE: 756 TYPE: N NAT: AACSB Reflective AICPA Legal A8. For liability purposes, some courts treat professional corporations somewhat like a partnership. T PAGE: 759 TYPE: N NAT: AACSB Analytic AICPA Legal A9. A promoter is personally liable for a preincorporation contract until the corporation assumes liability. T PAGE: 759 TYPE: N NAT: AACSB Analytic AICPA Legal A10. The articles of incorporation serve as a primary source of authority for a corporation. T PAGE: 761 TYPE: N NAT: AACSB Analytic AICPA Legal A11. Each incorporator must have an interest in the corporation. F PAGE: 762 TYPE: N NAT: AACSB Analytic AICPA Legal A12. Bylaws can conflict with the incorporation statute or the articles of incorporation. F PAGE: 763 TYPE: N NAT: AACSB Analytic AICPA Legal A13. Courts in some states will treat an alleged corporation as if it were an actual corporation for the purpose of determining the rights and liabilities in particular circumstances. T PAGE: 764 TYPE: N NAT: AACSB Analytic AICPA Legal A14. A corporation generally can engage in any act and enter into any contract available to a natural person. T PAGE: 765 TYPE: N NAT: AACSB Analytic AICPA Legal A15. To pierce the corporate veil means to ignore the corporate structure, exposing the shareholders to personal liability. T PAGE: 766 TYPE: N NAT: AACSB Analytic AICPA Legal A16. A court will not pierce the corporate veil of a corporation that is merely too “thinly” capitalized. F PAGE: 766 TYPE: N NAT: AACSB Analytic AICPA Legal A17. Stocks represent the borrowing of funds by firms. F PAGE: 769 TYPE: N NAT: AACSB Analytic AICPA Legal A18. Common stock provides a proportionate interest in the corporation with regard to control. T PAGE: 769 TYPE: N NAT: AACSB Analytic AICPA Legal A19. Firms are obligated to return a principal amount per share to each holder of common stock. F PAGE: 769 TYPE: N NAT: AACSB Reflective AICPA Critical Thinking A20. Venture capital is capital provided to new business ventures by professional, outside investors. T PAGE: 771 TYPE: N NAT: AACSB Reflective AICPA Legal MULTIPLE CHOICE QUESTIONS A1. Ivy and Justin want to form and do business as Kayak Adventures Corporation. A corporation can be owned by a. natural persons only. b. artificial persons only. c. artificial or natural persons. d. neither “artificial” nor “natural” persons. C PAGE: 753 TYPE: N NAT: AACSB Reflective AICPA Legal A2. Skyla and Terry want to form and do business as Unique Boutique Corporation. Most statutes governing the formation and use of corporations are guided by a. city or county corporate codes. b. the Entrepreneur’s Corporate Handbook. c. the federal Administrative Procedure Act. d. the Revised Model Business Corporation Act. D PAGE: 753 TYPE: = NAT: AACSB Reflective AICPA Legal Fact Pattern 39-1A (Questions A3–A4 apply) Mountaintop Clearview Corporation authorizes Niles, its employee, to oversee its timber operation. In the course of his employment, Niles disposes of the operation’s waste illegally. Orson is a Mountaintop shareholder. A3. Refer to Fact Pattern 39-1A. With respect to Mountaintop and Niles, liability for this crime most likely rests with a. neither Mountaintop nor Niles. b. Mountaintop and Niles. c. Mountaintop only. d. Niles only. B PAGE: 754 TYPE: + NAT: AACSB Reflective AICPA Legal A4. Refer to Fact Pattern 39-1A. Liability for Niles’s act most likely rests with Orson to a. no extent. b. the proportionate extent of the number of shares Orson owns. c. the amount of Orson’s investment in the firm. d. the full extent. C PAGE: 754 TYPE: N NAT: AACSB Reflective AICPA Legal A5. Digitech is a foreign corporation, which means that Digitech a. is an alien corporation. b. is chartered in a foreign country. c. may be required to obtain a certificate of authority to do business. d. may do business only in foreign countries. C PAGE: 756 TYPE: = NAT: AACSB Reflective AICPA Legal A6. Convenience Mart, Inc., is a closely held corporation. Convenience Mart is a. eligible to make public offerings of securities. b. exempt from filing a certificate of incorporation. c. generally allowed to restrict the transfer of its stock. d. taxed in the same manner as a partnership. C PAGE: 757 TYPE: = NAT: AACSB Reflective AICPA Legal A7. Boutique Corporation would like to change its corporate status to avoid in-come taxes at the corporate level. To qualify, the shareholders must not be a. corporations. b. estates. c. individuals. d. partnerships. D PAGE: 759 TYPE: = NAT: AACSB Reflective AICPA Legal A8. Jim and Kiley are architects and members of J&K, P.C., a profes¬sional corporation. Jim supervises Luc, an employee of the firm. As a member, Jim a. is personally liable for any tort committed by Kiley. b. has limited liability for any of Kiley’s acts of malpractice. c. has no liability for any torts committed by Kiley or Luc. d. may be personally liable for malpractice committed by Luc. D PAGE: 759 TYPE: = NAT: AACSB Reflective AICPA Legal A9. To qualify as a professional corporation, Medical Clinic, P.C., a. must be a corporation formed by professionals. b. must grant all shareholders voting rights. c. must have at least thirty-five shareholders. d. all of the choices. A PAGE: 759 TYPE: = NAT: AACSB Reflective AICPA Legal A10. Sullivan and Taylor want to form a corporation to provide catering services. The first step in the incorporation procedure is to a. file the articles of incorporation. b. hold the first organizational meeting. c. secure a corporate name. d. select a state in which to incorporate. D PAGE: 760 TYPE: + NAT: AACSB Reflective AICPA Critical Thinking A11. Suki is a registered agent for Trans-state Trucking, Inc. (TTI), which incorporated in Utah. As a registered agent, Suki a. agreed to buy stock in TTI before it existed. b. applied to Utah on behalf of TTI to obtain its corporate charter. c. does business for TTI in Utah. d. receives legal documents on behalf of TTI. D PAGE: 761 TYPE: = NAT: AACSB Reflective AICPA Legal A12. Stan incorporates his scientific products business as Tech Precision Supply, Inc. This firm could have perpetual existence in a. a few states. b. all states. c. most states. d. no states. C PAGE: 762 TYPE: = NAT: AACSB Reflective AICPA Legal A13. Hailey and Ike hold the first organizational meeting of Java Kiosk Corporation. Probably the most important function of this meeting is a. adopting Java’s bylaws. b. agreeing on Java’s purpose. c. drafting Java’s articles. d. obtaining a charter for Java. A PAGE: 763 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A14. Start-Up Corporation substantially complies with all conditions prece¬dent to incorpo¬ration. Start-Up has a. corporate existence by estoppel. b. de facto existence. c. de jure existence. d. ultra vires existence. C PAGE: 763 TYPE: = NAT: AACSB Reflective AICPA Legal A15. Eager Beaver Corporation fails to hold a meeting to adopt bylaws. Under this circumstance, Eager Beaver will still be treated as a legal corporation in those states that recognize the common law doctrine of a. corporation by estoppel. b. de facto corporation. c. de jure corporation. d. ultra vires. B PAGE: 763 TYPE: + NAT: AACSB Reflective AICPA Legal A16. Quixotic Company claims to be a corporation but it is not. Rachel signs a con¬tract with Quixotic that is not performed. In Rachel’s suit against Quixotic, a court will likely recognize the firm as a. a corporation by estoppel. b. a de facto corporation. c. a de jure corporation. d. an ultra vires corporation. A PAGE: 764 TYPE: = NAT: AACSB Reflective AICPA Legal A17. Wild & Scenic River Tours, Inc., is a corporation. Wild & Scenic has the implied power to a. issue stocks and bonds. b. execute contracts and negotiable instruments. c. buy and sell (or lease) property. d. perform all acts reasonably appropriate and necessary to accom¬plish its corporate purposes. D PAGE: 765 TYPE: + NAT: AACSB Reflective AICPA Critical Thinking A18. Omega Corporation makes and markets digital timers, clocks, and related products. Like other business corpo¬rations, Omega issues securities to a. increase its market share. b. obtain financing. c. reduce its production costs. d. safeguard its facilities. B PAGE: 769 TYPE: = NAT: AACSB Reflective AICPA Risk Analysis A19. Mari buys 500 shares of common stock in National Livestock Traders, Inc. As a shareholder of record, Mari owns a proportionate interest in terms of a. control, earnings, and net assets. b. control only. c. earnings and net assets only. d. neither control nor earnings and net assets. A PAGE: 769 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking A20. Discount Factory Outlets, Inc., issues bonds. Bonds a. are issued by businesses only. b. are sometimes referred to as “stock with preferences.” c. have maturity dates. d. require periodic interest payments from their owners. C PAGE: 769 TYPE: = NAT: AACSB Reflective AICPA Critical Thinking ESSAY QUESTIONS A1. Agents and employees of Apples Corporation and Oranges Corporation are convicted of conspiring to violate a fed¬eral law that is punishable by a term of imprisonment and a fine. Can the corporations be held liable for these crimes? If so, how can they be punished? A2. Incredible eSales Corporation is a new Internet business. How can Incredible eSales obtain capi¬tal to finance its operations?