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Multiple Choice
1.   c
2.   a   By having to maintain some fixed amount of capital, an equal minimum amount of assets
       must be maintained on the balance sheet. Legal capital is a broader concept than par value;
       also, legal capital has no connection to retained earnings.
3.   a   Total paid-in capital minus paid-in capital in excess of par: $500,000 − $450,000 = $50,000
4.   b   Legal capital is defined differently in different states and may sometimes involve amounts
       other than par or stated value. The accounting presentation of legal capital is a simple
       presentation that does not include calculations other than par or stated value.
5.   b
6.   c    It’s all about getting the most money at the lowest cost.
7.   d   Retained earnings can be negative if cumulative net losses exceed net income; this is called a
       deficit. Retained earnings is not part of paid-in capital; retained earnings comes from the
       business operations. Legal capital normally only relates to designated paid-in capital items.
8.   c   Total cash received is $8 × 20,000 = $160,000. Common Stock account is 20,000 × $.10 = $2,000.
9.   d   Total paid-in capital is: (10,000 × $50) + ($.01 × 100,000) + $171,000 = $672,000. Total
       stockholders’ equity is retained earnings plus total paid-in capital: $720,000 + $672,000 =
       $1,392,000.
10.   d
11.   c   The attorney’s bill is $10,000, and there is no information about the value of the stock.
       The complete journal entry is:
 
Organization Expense 10,000  
  Common Stock   2,000
  Paid-in Capital in Excess of Par   8,000
12.   c
13.   a
14.   b   20,000 × $100 × .06 = $120,000
15.   b   $200,000 − (5,000 × $5) = $175,000
16.   a   $250,000 − (7,000 × $100 × .04 × 3) = $166,000
17.   c
18.   d   Choice (a) is incorrect because an amount of no-par stock shown as a Common Stock or
       Preferred Stock balance can significantly exceed its designated legal capital. The calculation
       of legal capital varies by state and the exact amount is not shown in stockholders’ equity.
19.   a   Amounts shown as Common Stock or Preferred Stock identify legal capital only as a rough
       approximation in the case of par value stock. For no-par stock, a balance in Common Stock
       or Preferred Stock usually exceeds its designated legal capital.
20.   c
21.   a
22.   a
23.   b
24.   c
25.   b   Retained earnings are available for dividends.
Learning Goal 29
SOLUTIONS
     
Learning Goal 29: The Owners’ Equity of a Corporation
S1
  
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