Pearls, Inc. had sales in 2013 of $2.1 million. The common stockholders received $600,000 in cash dividends

Pearls, Inc. had sales in 2013 of $2.1 million. The common stockholders received $600,000 in cash dividends.  Interest totaling $150,000 was paid on outstanding debts. Operating expenses totaled $300,000, and cost of goods sold was $500,000.  What is the tax liability of Pearls, Inc.? 2013 U.S. Corporate tax rates are shown below:

Taxable Income	Marginal Tax Rate
$0-$50,000	15%
$50,001-$75,000	25%
$75,001-$100,000	34%
$100,001-$335,000	39%
$335,001-$10,000,000	34%
$10,000,001-$15,000,000	35%
$15,000,001-$18,333,333	38%
Over $18,333,333	35%

Answer:  Pearls Taxable Income

Sales                                                          $2,100,000

Less:

Cost of goods sold                                    $500,000

Operating expenses                                  300,000

Earnings before interest & taxes       $1,300,000

Interest expense                                          150,000

Taxable income                                       1,150,000

Total taxes owed                                      $391,000

Taxes on operating earnings = (.15)(50,000) + (.25)(25,000) + (.34) 25,000) + (.39)(235,000) +.(34)(735,000)= 7,500 + 6,250 + 8500 + 91,650+277,100 = $391,000 or

                                Because taxable income is over $335,000

                                taxes can be computed 1,150,000 × .34 =

                                $391,000

All publicly held corporations are regulated by what government organization?

A) The Financial Accounting Standards Board.

B) The Commission on Accounting Procedures.

C) The Accounting Principles Board.

D) The Securities and Exchange Commission.

Answer: D

The disadvantages of the corporate form of business include:

A) Ability to transfer ownership.

B) Additional taxes.

C) Limited liability.

D) Ability to raise capital.

Answer: B

Common stockholders usually have all of the following rights except:

A) To receive dividends when declared.

B) To share in the distribution of assets.

C) To elect board of directors.

D) To participate in the day-to-day operations.

Answer: D

The distribution of stock rights to existing common stockholders will increase paid-in capital at the

The distribution of stock rights to existing common stockholders will increase paid-in capital at the

Date of Issuance Date of Exercise

of the Rights of the Rights


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: No Yes

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably

a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities involved.


Answer: based on the relative market values of the two securities involved

The major difference between convertible debt and stock warrants is that upon exercise of the warrants

a. the stock is held by the company for a defined period of time before they are issued to the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a set period of time.
d. no paid-in capital in excess of par can be a part of the transaction.

Answer: the holder has to pay a certain amount of cash to obtain the shares

The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the

The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the

a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.


Answer: market value of the shares issued

At the date of declaration of a small common stock dividend, the entry should not include

a. a credit to Common Stock Dividend Payable.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.


Answer: a credit to Common Stock Dividend Payable

The balance in Common Stock Dividend Distributable should be reported as a(n)

a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.


Answer: addition to capital stock.