Chapter 40 Corporate Directors, Officers, and Shareholders. All Answers

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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 Ban... k. = A question included in the previous edition of the Test Bank. TRUE/FALSE QUESTIONS A1. Shareholders are the ultimate authority in every corporation. F PAGE: 775 TYPE: N NAT: AACSB Reflective AICPA Critical Thinking A2. Many qualifications are required for directors. F PAGE: 775 TYPE: N NAT: AACSB Analytic AICPA Legal A3. An amendment to the articles of incorporation can create a new position on the board of directors. T PAGE: 776 TYPE: N NAT: AACSB Analytic AICPA Legal A4. An inside director is a director who does not hold a management position in the corporation. F PAGE: 776 TYPE: N NAT: AACSB Analytic AICPA Legal A5. Directors have a right to participate in all board of directors’ meetings. T PAGE: 777 TYPE: N NAT: AACSB Analytic AICPA Legal A6. Committees of the board of directors focus on individual subjects. T PAGE: 777 TYPE: N NAT: AACSB Analytic AICPA Legal A7. Officers hire the directors and other executive employees. F PAGE: 778 TYPE: N NAT: AACSB Analytic AICPA Legal A8. The ordinary rules of agency normally do not apply to the employment of corporate officers. F PAGE: 778 TYPE: N NAT: AACSB Analytic AICPA Legal A9. A director or officer is required to exercise the care that an ordinarily prudent person would exercise in similar circumstances. T PAGE: 779 TYPE: N NAT: AACSB Analytic AICPA Legal A10. Directors are entitled to use corporate funds for their personal advantage. F PAGE: 780 TYPE: N NAT: AACSB Analytic AICPA Legal A11. Directors are not obligated to refrain from self-dealing. F PAGE: 780 TYPE: N NAT: AACSB Analytic AICPA Legal A12. A director must make a full disclosure of any potential conflict of interest that might arise in any corporate transaction. T PAGE: 782 TYPE: N NAT: AACSB Analytic AICPA Legal A13. Shareholders are co-owners of the corporation. T PAGE: 783 TYPE: N NAT: AACSB Analytic AICPA Legal A14. Shareholders’ meetings need not occur at any certain interval. F PAGE: 784 TYPE: N NAT: AACSB Analytic AICPA Legal A15. In some states, obtaining the unanimous written consent of sharehold¬ers is a permissible alternative to holding a shareholders’ meeting. T PAGE: 785 TYPE: N NAT: AACSB Analytic AICPA Legal A16. Dividends are distributed on the basis of possession of a stock certificate. F PAGE: 786 TYPE: N NAT: AACSB Analytic AICPA Legal A17. Dividends can be paid in the stock of the corporation that is paying the dividends. T PAGE: 787 TYPE: N NAT: AACSB Analytic AICPA Legal A18. Every shareholder is entitled to examine specified corporate records. T PAGE: 788 TYPE: N NAT: AACSB Analytic AICPA Legal A19. When a third party harms a corporation, only the shareholders can bring a suit in the corporation’s name against that party. F PAGE: 788 TYPE: N NAT: AACSB Analytic AICPA Legal A20. Shareholders are personally liable for the debts of a corporation. F PAGE: 790 TYPE: N NAT: AACSB Analytic AICPA Legal MULTIPLE CHOICE QUESTIONS A1. Gillian is a director of Fizzy Soda Company. As a director, Gillian can act as an agent to bind Fizzy a. in all circumstances. b. in no circumstances. c. to any contract in which Fizzy does not have a conflict of interest. d. to any contract that represents a corporate opportunity for Gillian. B PAGE: 775 TYPE: = NAT: AACSB Reflective AICPA Legal A2. Rhea is a director of Spex Corporation, which makes and sells sunglasses and other eyewear. As a Spex director, Rhea sits on the board, which a. governs Spex. b. is governed by the Spex incorporators. c. is governed by the Spex officers. d. is governed by the Spex shareholders. A PAGE: 775 TYPE: N NAT: AACSB Reflective AICPA Legal A3. Lon and Merry act as the incorporators for NuGame Corporation. After the first board of directors is chosen, subsequent directors are elected by a majority vote of NuGame’s a. board of directors. b. incorporators. c. officers. d. shareholders. D PAGE: 775 TYPE: = NAT: AACSB Reflective AICPA Legal A4. Bret and Courtney form Delite Day Care, Inc. Ultimate respon¬sibility for pol¬icy decisions necessary to the management of corporate affairs rests with Delite’s a. board of directors. b. incorporators. c. officers. d. shareholders. A PAGE: 775 TYPE: = NAT: AACSB Reflective AICPA Legal A5. Frida, Gayla, and Hart occupy the positions of director on the board of Integral Components Corporation. With respect to these directors, a quorum is the minimum number a. who must be at odds in a dispute to call for its resolution. b. who must be present to validly transact business. c. whom the shareholders may remove from office at any one time. d. whose positions must be vacant to warrant an election. B PAGE: 776 TYPE: = NAT: AACSB Reflective AICPA Legal A6. Reba is a director of Quantum Mechanix Corporation. Reba’s rights, as a di-rector, do not include a right to a. indemnification. b. inspection. c. participation. d. self-dealing. D PAGE: 777 TYPE: + NAT: AACSB Reflective AICPA Legal A7. Melba and Leon are directors of Fresh Foods, Inc. The right of Melba and Leon to be notified of special meetings of the board is the right to a. compensation. b. indemnification. c. participation. d. self-dealing. C PAGE: 777 TYPE: + NAT: AACSB Reflective AICPA Legal A8. Frawsty Corporation distributes beverages in the greater Northwest. Frawsty’s board of directors can delegate some of its functions to a. Frawsty’s incorporators. b. Frawsty’s officers. c. Frawsty’s shareholders. d. no one. B PAGE: 777 TYPE: = NAT: AACSB Reflective AICPA Legal A9. VeriVisual Company makes HD 3D film and video equipment. VeriVisual is like most cor¬porations in that its officers are hired by the firm’s a. board of directors. b. incorporators. c. other officers. d. shareholders. A PAGE: 778 TYPE: = NAT: AACSB Reflective AICPA Legal A10. Odell is a director of Price Rite, Inc. As a director, with respect to the corporation, Odell is a. a fiduciary. b. a forum. c. a proxy. d. a quorum. A PAGE: 778 TYPE: N NAT: AACSB Reflective AICPA Legal A11. Luke is a director of Motor Parts Corporation. Luke makes decisions with respect to Motor Parts in good faith, in what Luke believes is the firm’s best interest, and without violating any duties owed to it. If, despite these circumstances, Luke exercises poor business judgment, under the business judgment rule Luke is a. immune from liability. b. liable only to the extent that Luke gains as a result. c. liable only to the extent that Motor Parts suffers as a result. d. wholly liable. A PAGE: 779 TYPE: = NAT: AACSB Reflective AICPA Legal A12. Gladys is a shareholder of Frozen Yogurt, Inc. As a shareholder, Gladys must approve a. amending the bylaws. b. declaring a corporate dividend. c. hiring a chief executive officer. d. issuing additional shares. A PAGE: 783 TYPE: + NAT: AACSB Reflective AICPA Legal A13. Heidi and Ian are directors and shareholders of Globe Software, Inc. Heidi’s written authorization to Ian to vote Heidi’s shares at a Globe shareholders’ meeting is a. a violation of the duty of loyalty. b. a preemptive right. c. a proxy. d. a quorum. C PAGE: 784 TYPE: N NAT: AACSB Reflective AICPA Legal A14. Thor Power Products Corporation permits the election of its directors by cumulative voting. This a. allows minority shareholders to be represented on the board. b. assures directors that they will be selected by their peers. c. guarantees Thor’s executive officers of the final choice. d. insures against persons who may “cloud” the corporate direction. A PAGE: 785 TYPE: = NAT: AACSB Reflective AICPA Legal A15. Fiona owns one share of stock in GR8 Boards Corporation, as evidenced by a stock certificate. Fiona loses the certificate. Her ownership of the stock is a. forfeited immediately. b. forfeited within ten days of a third party’s claim to ownership. c. forfeited within thirty days if she cannot find the certificate. d. not affected. D PAGE: 786 TYPE: = NAT: AACSB Reflective AICPA Legal A16. In all states, Exercise & Fitness Club Company and other corporations can pay dividends from a. gross profits. b. net profits. c. retained earnings. d. surplus. C PAGE: 787 TYPE: = NAT: AACSB Reflective AICPA Legal A17. Bev is a shareholder of All-Terrain Vehicle Company. As a share¬holder, Bev does not have a. a right to compensation. b. dividend rights. c. inspection rights. d. preemptive rights. A PAGE: 788 TYPE: = NAT: AACSB Reflective AICPA Legal Fact Pattern 40-1A (Questions A18–A19 apply) Ruben is a shareholder of Speed Bikes Company (SBC). When the direc¬tors fail to undertake an action to redress a wrong suffered by SBC, Ruben files a suit on the firm’s behalf. A18. Refer to Fact Pattern 40-1A. Ruben’s suit is a shareholder’s a. indemnification suit. b. derivative suit. c. proxy suit. d. preemptive suit. B PAGE: 788 TYPE: + NAT: AACSB Reflective AICPA Legal A19. Refer to Fact Pattern 40-1A. Any damages recovered by Ruben’s suit will normally go to a. Ruben. b. SBC. c. SBC’s directors. d. the state in which SBC is incorporated. B PAGE: 788 TYPE: = NAT: AACSB Reflective AICPA Legal A20. Clark is a shareholder of Bedrest Mattress Company. Clark will be deemed to have a fiduci¬ary duty to Bedrest and its minority share¬hold¬ers if he has a. preferred stock. b. a right of first refusal. c. a sufficient number of shares to exercise de facto control. d. watered stock. C PAGE: 791 TYPE: + NAT: AACSB Reflective AICPA Legal ESSAY QUESTIONS A1. Tank is a director and the majority shareholder of Unique New Investment Corporation (UNIC). Tank buys, for $1,500, an option to pur¬chase a tract of real estate for $50,000. Tank forms Vista Property, Inc., to hold the option. As the majority shareholder, and thus controlling di¬rector, of UNIC, Tank orders the firm to authorize the pur¬chase of the land from Vista Property for $500,000. Tank then has Vista Property buy the land, sell it to UNIC, and loan the money to UNIC for the purchase at a 10 percent interest rate. Wim, a minority shareholder in UNIC, com¬plains to UNIC’s board, which takes no action. Wim files a suit against Tank on UNIC’s behalf. Will Wim prevail? Explain. A2. Dimitri is a director and shareholder of Equitable Corporation and of Four Square Products, Inc. A resolution comes before the Equitable board to compete with Four Square. What is Dimitri’s responsibility? [Show More]

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