Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS

1. Question

   (L.O. 1) Which of the following is not a characteristic of a corporation?

   1. Separate legal entity.
   2. Limited liability of owners.
   3. Flexible ownership.
   4. Nontaxable entity.

   Approach and Explanation: Mentally review the list of the most important characteristics of a corporation. Compare the answer selections with that list. The list includes: (1) separate legal existence, (2) limited liability of stockholders, (3) transferable ownership rights, (4) ability to acquire capital, (5) continuous life, and (6) corporation management. As an entity separate and distinct from its owners, the corporation acts under its own name rather than in the name of its stockholders. A corporation may buy, own, and sell property, borrow money, and enter into legally binding contracts in its own name. It may also sue or be sued, and it pays its own taxes. (Solution = d.)

2. Question

   (L.O. 1) Which of the following is true with regard to a corporation?

   1. Revenues and expenses do not affect owners' equity.
   2. Retained earnings, which is an element of owners' equity, is increased by revenues and is decreased by expenses.
   3. Revenues and expenses are ultimately closed to the Paid-in Capital in Excess of Par Value account.
   4. Revenue and expense accounts are never closed.

   Explanation: Retained earnings is net income retained in a corporation. A corporation with net income of $52,000 will close the Income Summary account by the following closing entry:

   Thus, revenues (reflected ...