Certified Public Accountant CPA Questions + Answers Part 8
Posted: Tue Feb 22, 2022 6:10 pm
QUESTION 50
Which of the following statements is(are) correct regarding the methods a target corporation may use to ward off a takeover attempt?
A. Thetargetcorporationmaymakeanoffer("self-tender")toacquirestockfromitsownshareholders.
II. The target corporation may seek an injunction against the acquiring corporation on the grounds that the attempted takeover violates federal antitrust law.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Rule: A tender offer is a general invitation by a bidder to the shareholders of a target company to tender their shares to the bidder at a specified price during a specified time. A target of a takeover may ward off a tender offer by offering to repurchase shares from its shareholders. If a takeover will violate federal antitrust law, a court will enjoin the takeover. Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 51
Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn's objectives without requiring the approval of the shareholders of either corporation?
A. AmergerofTrendintoAcorn,wherebyTrendshareholdersreceivecashorAcornshares.
B. AsaleofalltheassetsofTrend,outsidetheregularcourseofbusiness,toAcorn,forcash.
C. An acquisition of all the shares of Trend through a compulsory share exchange for Acorn shares.
D. A cash tender offer, whereby Acorn acquires at least 90% of Trend's shares, followed by a short- form merger of Trend into Acorn.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A parent corporation owning 90% or more of a subsidiary may merge the subsidiary (short form merger) into the parent without the approval of the shareholders of either corporation or the approval of the subsidiary's board.
Choices "a", "b", and "c" all require at least one of the corporations to follow the general procedure for fundamental corporate changes (i.e., board resolution notice, approval by majority shares, and filing).
QUESTION 52
Under the Revised Model Business Corporation Act, which of the following must be contained in a corporation's articles of incorporation?
A. Quorumvotingrequirements.
B. Namesofstockholders.
C. Provisions for issuance of par and nonpar shares.
D. The number of shares the corporation is authorized to issue.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The articles must set out the corporation's authorized shares. Choice "a" is incorrect. Quorum requirements, if stated at all, usually are in the bylaws; they need not be included in the articles of incorporation.
Choice "b" is incorrect. The articles need not include the names of stockholders. Choice "c" is incorrect. The RMBCA has eliminated the concept of par value and so does not have a requirement that par value be established in the articles.
QUESTION 53
Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following, except:
A. Aformalplanofmerger.
B. Anaffirmativevotebytheholdersofamajorityofeachcorporation'svotingshares. C. Receipt of voting stock by all stockholders of the original corporations.
D. Approval by the board of directors of each corporation.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A merger can be effected by giving some parties cash or property; not everyone need receive voting shares.
Choice "a" is incorrect. The merger must be pursuant to a formal plan. Choice "b" is incorrect. The majority of each corporation generally must approve a merger. Choice "d" is incorrect. A plan of merger must be approved by the boards of the merging corporations.
QUESTION 54
Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter?
A. Provisionfortheauthorizationofvotingstock. II. Name of the corporation.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Both I and II.
Rule: In order to obtain a corporate charter, a for-profit corporation must include in its articles of incorporation the name of the corporation and a provision for the authorization of voting stock. In addition, the articles of incorporation must include the names of the incorporators and the name and address of the registered agent.
Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 55
Generally, a corporation's articles of incorporation must include all of the following, except the:
A. Nameofthecorporation'sregisteredagent. B. Nameofeachincorporator.
C. Number of authorized shares.
D. Quorum requirements.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A corporation's articles of incorporation need not contain any information regarding quorum requirements.
Choices "a", "b", and "c" are incorrect because under the Revised Model Business Corporations Act a corporation's articles of incorporation must include: (1) The name of the corporation,
(2) The name and address of the corporation's registered agent, (3) The names and addresses of each of the incorporators, and (4) The number of shares authorized to be issued.
QUESTION 56
Which of the following actions may a corporation take without its stockholders' consent?
A. Consolidatewithoneormorecorporations. B. Mergewithoneormorecorporations.
C. Dissolve voluntarily.
D. Purchase 55% of another corporation's stock.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Directors are free to make most corporate decisions unilaterally. However, decisions that might fundamentally change the nature of the corporation require the consent of the shareholders. The purchase of 55% of another corporation's stock can be quite insignificant to the purchaser and is not a fundamental corporate change.
Choice "a" is incorrect because a consolidation is a fundamental corporate change. Choice "b" is incorrect because a merger is a fundamental corporate change. Choice "c" is incorrect because a dissolution is a fundamental corporate change.
QUESTION 57
Absent a specific provision in its articles of incorporation, a corporation's board of directors has the unilateral power to do all of the following, except: A. Repealthebylaws.
B. Declaredividends.
C. Fix compensation of directors.
D. Amend the articles of incorporation.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders. Choice "a" is incorrect. The directors ordinarily have the power to repeal bylaws unless the articles or the specific bylaw to be repealed provides otherwise.
Choice "b" is incorrect. The directors have the power to declare dividends at their discretion as long as the dividends do not violate any statute, article provision, bylaw, or contract with a creditor. Choice "c" is incorrect. Although it seems like there would be a conflict of interest, directors do have the power to set their own compensation, limited only by the fiduciary duties owed to the corporation (e.g., the directors cannot set salaries so high as to constitute waste).
QUESTION 58
Carr Corp. declared a 7% stock dividend on its common stock. The dividend:
A. MustberegisteredwiththeSECpursuanttotheSecuritiesActof1933.
B. Isincludableinthegrossincomeoftherecipienttaxpayersintheyearofreceipt. C. Has no effect on Carr's earnings and profits for federal income tax purposes.
D. Requires a vote of Carr's stockholders.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A stock dividend means that the corporation issues its existing shareholders more stock. In essence, the corporation is merely diluting the proportional ownership interest of existing shares. This has no effect on the corporation's earnings and profits for federal income tax purposes. Choice "a" is incorrect. There is no requirement that stock dividends be registered with the SEC because no "sale" is involved.
Choice "b" is incorrect. The receipt of a stock dividend is not the recognition of income. It merely divides the stockholders' current ownership interests into more pieces; it does not increase proportional ownership interest in the corporation.
Choice "d" is incorrect. The issuance of dividends, including stock dividends, is at the directors' discretion; shareholders do not vote on dividends.
QUESTION 59
Which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled to?
A. Conversionofthepreferredstockintocommonstock.
B. Votingrights.
C. Dividend carryovers from years in which dividends were not paid, to future years. D. Guaranteed dividends.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year.
Choice "a" is incorrect. There is no right to convert preferred shares into common stock unless that right is specifically granted.
Choice "b" is incorrect. Preferred stock need not have voting rights. Choice "d" is incorrect. Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.
QUESTION 60
Under the Revised Model Business Corporation Act, a dissenting stockholder's appraisal right generally applies to which of the following corporate actions?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Business Environment and Concepts (Volume A)
Explanation Explanation/Reference:
Explanation:
Choice "a" is correct. "Yes-Yes."
Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right.
Rule: A short-form merger is when a parent mergers a 90% or more owned subsidiary into the parent. In this case, only the shareholders of the subsidiary have dissenting rights. Choices "b", "c", and "d" are incorrect, per the above rules.
QUESTION 61
Which of the following actions may be taken by a corporation's board of directors without stockholder approval?
A. Purchasingsubstantiallyalloftheassetsofanothercorporation. B. Sellingsubstantiallyallofthecorporation'sassets.
C. Dissolving the corporation.
D. Amending the articles of incorporation.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Purchasing substantially all the assets of another corporation does not require approval of the buyer's stockholders. Such a transaction would be relatively insignificant if a large corporation purchased substantially all the assets of a much smaller corporation. Choice "b" is incorrect. Selling substantially all of the corporation's assets is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval. Choice "c" is incorrect. Dissolving the corporation is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval.
Choice "d" is incorrect. Amending the articles of incorporation is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval.
QUESTION 62
To which of the following rights is a stockholder of a public corporation entitled?
A. Therighttohaveannualdividendsdeclaredandpaid.
B. Therighttovotefortheelectionofofficers.
C. The right to a reasonable inspection of corporate records.
D. The right to have the corporation issue a new class of stock.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Stockholders have a right to inspect certain corporate records. Choice "a" is incorrect. Declaration of dividends is within the directors' discretion. There is no absolute right of shareholders to receive annual dividends.
Choice "b" is incorrect. Officers are appointed by the directors; they are not elected by the shareholders.
Choice "d" is incorrect. Shareholders do not have a right to force the corporation to issue a new class of stock.
QUESTION 63
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?
A. Thesubsidiarycorporation'sboardofdirectorsmustpassamergerresolution.
B. Thesubsidiarycorporation'sdissentingstockholdersmustbegivenanappraisalremedy. C. The parent corporation's stockholders must approve the merger.
D. The parent corporation's dissenting stockholders must be given an appraisal remedy.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy.
Choice "a" is incorrect. The subsidiary's board is not required to take any action in a short-form merger. Choice "c" is incorrect. The parent corporation's shareholders have no right to approve or disapprove a short-form merger.
Choice "d" is incorrect. The parent corporation's shareholders have no right to dissent to a short-form merger.
QUESTION 64
Davis, a director of Active Corp., is entitled to:
A. Serveontheboardofacompetingbusiness.
B. TakesoleadvantageofabusinessopportunitythatwouldbenefitActive. C. Rely on information provided by a corporate officer.
D. Unilaterally grant a corporate loan to one of Active's shareholders.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. As a director of the corporation Davis may rely on information provided to him/her by a corporate officer. A corporate director is under no obligation to verify information given to him by management (corporate officers).
Choice "a" is incorrect. A director is not entitled to serve on the board of a competing business. Doing so would be a breach of fiduciary duty.
Choice "b" is incorrect. A director may not take sole advantage of a business opportunity that would benefit the corporation. Doing so would be a breach of fiduciary duty. Choice "d" is incorrect. A director may not unilaterally grant a corporate loan to one of the corporation's shareholders. Directors generally must act through a majority vote at a directors' meeting.
QUESTION 65
Knox, president of Quick Corp., contracted with Tine Office Supplies, InC. to supply Quick's stationery on customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick's board of directors that Knox was a majority stockholder in Tine. Quick's contract with Tine is:
A. VoidbecauseofKnox'sself-dealing.
B. Voidbecausethedisclosurewasmadeafterexecutionofthecontract. C. Valid because of Knox's full disclosure.
D. Valid because the contract is fair to Quick.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders, who then approve the transaction, or the director can prove that the transaction was fair to the corporation. The stationery purchase was fair to Quick, since it was purchased at a below-market price. Thus, the contract is valid. Choice "a" is incorrect. A director's self-dealing does not automatically make a contract voiD. The contract can be upheld if it was fair.
Choice "b" is incorrect. A director's self-dealing does not automatically make a contract voiD. The contract can be upheld if it was fair.
Choice "c" is incorrect. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director
makes full disclosure of all of the facts to the disinterested directors or shareholders, who then approve the transaction, or the director can prove that the transaction was fair. Mere disclosure after the contract was adopted does not automatically render the contract valid.
QUESTION 66
A stockholder's right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to:
A. Commenceastockholder'sderivativesuit.
B. Obtainstockholdernamesforaretailmailinglist.
C. Solicit stockholders to vote for a change in the board of directors. D. Investigate possible management misconduct.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes related to the stockholder's interest in the corporation. This right will be denied where the purpose is not reasonably related to their status as a shareholder. Obtaining stockholder names to create a retail mailing list is a personal purpose. Choices "a", "c", and "d" are incorrect. The following reasons for shareholders to inspect the books of the corporation are reasonably related to their status as shareholders:
A. To commence a stockholder's derivative suit.
C. To solicit stockholders to vote for a change in the board of directors. D. To investigate possible management misconduct.
QUESTION 67
Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?
A. Assignment.
B. Novation.
C. Delegation.
D. Accord and satisfaction.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A promoter is personally liable for the contracts he or she enters into prior to incorporation. A corporation may become liable by adoption of the contract, and through the process of novation (an agreement among all of the parties), the promoter may be released from contractual obligations.
Choice "a" is incorrect. An assignment is a transfer of a contractual duty to perform. After the transfer, both the assignor and assignee may be held liable for performance. The assignor is not, thereby, released from liability.
Choice "c" is incorrect. A delegation is a transfer of a contractual duty to perform. Both the delegor and delegee are liable to perform after the assignment; it does not release the promoter from liability. Choice "d" is incorrect. An accord is an agreement to change the performance due under a contract. Once the new terms are performed or satisfied, the original contract terms are terminated. Such an agreement does not automatically result in release of a promoter.
QUESTION 68
Which of the following parties is liable to repay an illegal distribution to a corporation?
A. Adirectornotbreachinghisorherdutyinapprovingthedistributionandthecorporationissolvent. B. Adirectornotbreachinghisorherdutyinapprovingthedistributionandthecorporationisinsolvent. C. A shareholder not knowing of the illegality of the distribution and the corporation is solvent.
D. A shareholder knowing of the illegality of the distribution and the corporation is insolvent.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Illegal dividends from an insolvent company must be repaid to the corporation for the benefit of the creditors. A shareholder who knowingly accepts an illegal dividend is liable to return it.
Choices "a" and "b" are incorrect. If a director does not breach any duties in approving a distribution, the director is protected by the business judgment rule and is not liable for the distribution whether the corporation is solvent or insolvent.
Choice "c" is incorrect. A shareholder of a solvent corporation who unknowingly accepts an illegal distribution is not obligated to repay the distribution.
QUESTION 69
Which of the following may not own shares in an S corporation?
A. Individuals. B. Estates.
C. Trusts.
D. Corporations.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shareholders must be individuals, estates, or certain trusts. Corporations are not permitted to be shareholders of an S corporation. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 70
Which of the following decreases stockholder equity?
A. Investmentsbyowners.
B. Distributionstoowners.
C. Issuance of stock.
D. Acquisition of assets in a cash transaction.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Distributions to owners, typically in the form of dividends, will serve to reduce stockholders' equity.
Choice "a" is incorrect. Investments by owners, typically in the form of stock purchases or contributions, will serve to increase shareholders' equity. Choice "c" is incorrect. Issuance of stock by sale will increase shareholders' equity, while issuance of stock dividends will have no effect on total shareholders' equity. Stock dividends will reduce the book value of each share outstanding.
Choice "d" is incorrect. Acquisition of assets with cash will have no effect on total stockholders' equity. The acquisition of assets with cash will effectively reclassify assets from one type to another without impacting liabilities or equity.
QUESTION 71
Food Corp. owned a restaurant called The Ambers. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, "T.J. Jones for The Ambers." Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paiD. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.?
A. ItisnotliablebecauseJonesisliable.
B. Itisnotliablebecausethecorporationwasanundisclosedprincipal. C. It is liable because Jones is not liable.
D. It is liable because Jones had authority to make the contract.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Where an agent enters into a contract on behalf of a principal and discloses the existence and identity of the principal and acts with authority, the principal is liable and the agent is not liable. Here, Jones signed the contract with an indication that he was signing for the corporation. The president of a corporation is an agent of the corporation and has apparent authority to enter contracts that appear to be within the ordinary scope of the corporation's business. The restaurant repairs here appear to be with the scope of Food Corp.'s business. Therefore, Food Corp. will be bound because Jones had at least apparent authority.
Choice "a" is incorrect, per the rule stated above.
Choice "b" is incorrect. The president signed as acting on behalf of the corporation, thus disclosing the principal. Choice "c" is incorrect, per the rule stated above.
QUESTION 72
Which of the following statements describes the same characteristic for both an S corporation and a C corporation?
A. Bothcorporationscanhavemorethan100shareholders.
B. Bothcorporationshavethedisadvantageofdoubletaxation.
C. Shareholders can contribute property into a corporation without being taxed. D. Shareholders can be either citizens of the United States or foreign countries.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Either entity's shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the directors. Choice "a" is incorrect. An S corporation may not have more than 100 shareholders, although a C corporation may have as many shareholders as desired.
Choice "b" is incorrect. Only the C corporation is subject to the double taxation disadvantage. Choice "d" is incorrect. Only an S corporation is prohibited from having foreign country shareholders.
QUESTION 73
Smith was an officer of CCC Corp. As an officer, the business judgment rule applies to Smith in which of the following ways?
A. BecauseSmithisnotadirector,theruledoesnotapply.
B. IfSmithmakes,ingoodfaith,aseriousbuthonestmistakeinjudgment,SmithisgenerallynotliabletoCCCfordamagescaused.
C. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
D. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages. Choices "a", "c", and "d" are incorrect, per the above rule.
QUESTION 74
In which type of business entity is the entire ownership interest most freely transferable?
A. Generalpartnership.
B. Limitedpartnership.
C. Corporation.
D. Limitedliabilitycompany.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Among the business entities listed, entire ownership interests are most freely transferable in a corporation. Unless transferability is restricted by contract (restricted shares or voting trusts or voting agreements), there are no restrictions on the sale of corporate stock (the common stock represents the stockholders' ownership interest). The right to transfer ownership interests freely is one of the advantages of the corporate form of business.
Choice "a" is incorrect. A general partner in a general partnership may assign his or her right to receive profits or surplus. A general partner cannot assign his interest and confer partnership status on the assignee without unanimous consent of all other partners. Choice "b" is incorrect. Both general partners and limited partners in a limited partnership may assign the right to receive profits and surplus. Neither general nor limited partners can confer general or limited partnership status on the assignee without the unanimous consent of all general and all limited partners.
Choice "d" is incorrect. In most states, limited liability company (LLC) members may not sell and confer ownership interest without the consent of all LLC members.
QUESTION 75
Which of the following statements is correct regarding both debt and common shares of a corporation?
A. Commonsharesrepresentanownershipinterestinthecorporation,butdebtholdersdonothaveanownershipinterest. B. Commonshareholdersanddebtholdershaveanownershipinterestinthecorporation.
C. Common shares typically have a fixed maturity date, but debt does not.
D. Common shares have a higher priority on liquidation than debt.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation.
Choice "b" is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation.
Choice "c" is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards.
Choice "d" is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first. After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.
QUESTION 76
Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?
A. Theentitymayavoidtaxation.
B. Theentitymayhaveanynumberofowners.
C. The owner may participate in management while limiting personal liability.
D. The entity may make disproportionate allocations and distributions to members.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A member in a limited liability company has limited liability and the ability to manage, while a partner in a general partnership has full liability and the ability to manage. Choice "a" is incorrect. Generally, both entities' profits are taxable at the ownership level, but a Limited Liability Company may be taxed as an entity if it so elects. Choice "b" is incorrect. Both entities may have any number of owners. Choice "d" is incorrect. Both entities may make disproportionate allocations and distributions to their owners.
QUESTION 77
Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation?
A. Aleveragedbuyoutofassets.
B. Anacquisitionofstockfordebtsecurities. C. A cash tender offer.
D. A merger.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A merger involves one corporation joining with another corporation. The surviving corporation has all of the rights and liabilities of the merged corporation. Thus, the acquiring corporation automatically becomes liable for all obligations of the acquired corporation. Choice "a" is incorrect. A leveraged buyout is a strategy involving the acquisition of another corporation using a significant amount of borrowed money (bonds or loans). Often, the assets of the corporation being acquired are used as collateral for the loans (in addition to the assets of the acquiring corporation).
The acquiring corporation does not automatically become liable for all (or any) obligations of the acquired corporation if it merely acquires another corporation's assets. Choice "b" is incorrect. An acquisition of stock for debt securities does not make the acquiring corporation liable for the obligations of the acquired corporation. The acquiring corporation has simply purchased stock. In an acquisition of stock for debt securities, the acquired corporation becomes a subsidiary of the acquiring corporation and the acquired corporation remains a separate entity liable for its own obligations.
Choice "c" is incorrect. A cash tender offer is an offer to purchase a corporation's stock directly from its shareholders at a specified price for a specified period of time. In a cash tender offer, the acquiring corporation does not automatically become liable for all obligations of the acquired corporation. In fact, if there is only an offer, there is no transaction at all.
QUESTION 78
Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?
A. Anindependentappraisermustrendertotheboardofdirectorsafairnessopiniononthecontract.
B. Thedirectormustdisclosetheinteresttotheindependentmembersoftheboardandrefrainfromvoting. C. The shareholders must review and ratify the contract.
D. The director must resign from the board of directors.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is clearly the best answer here, although it is not completely correct. Directors owe their corporation a duty of loyalty and must act solely in the best interests of the corporation. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders who then approve the transaction, or the transaction is fair. Thus, disclosing the interest to the independent members and refraining from voting is one way to ensure the validity of a contract between a director and his or her corporation, but it technically is not required as disclosure to and approval by the shareholders also ensures validity, as does making sure the transaction is fair to the corporation. Nevertheless, the other choices are clearly incorrect - making this the best choice. Choice "a" is incorrect. A transaction with an interested director will be upheld if it is fair, but it is not necessary to hire an independent appraiser to prove fairness. Choice "c" is incorrect. One method of approving a contract with an interested director is to disclose all of the material facts to the shareholders and seek their approval. Merely allowing the shareholders to review the contract is not sufficient.
Choice "d" is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the director to resign from the board (i.e., a director is not required to resign because of a conflict of interest). The corporation can approve the conflict if it is disclosed and the director does not participate in the approval process.
QUESTION 79
Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock?
A. Astockdividendisprohibitedinsuchacorporation.
B. Astockdividendincreasesastockholder'sproportionateshareofcorporateownership.
C. A stock dividend causes a decrease in the assets of the corporation.
D. A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Stock dividends are dividends in the corporation's own authorized but unissued shares given to existing shareholders on account of their shares. Choice "a" is incorrect. Despite the fact that a stock dividend in a corporation with only one class of par value stock does not change a shareholder's proportional ownership or affect capitalization of the corporation, nothing prohibits a corporation--even a corporation with only one class of par value stock--from declaring a stock dividend.
Choice "b" is incorrect. With a stock dividend, when there is only one class of stock, each shareholder receives a proportionate amount of stock, resulting in each shareholder owning the same percentage of the corporation after the dividend is issued as he or she owned before the dividend was issued. Choice "c" is incorrect. When a stock dividend is issued in a corporation's own stock, no assets are distributed and the solvency of the corporation remains the same.
QUESTION 80
Which of the following corporate actions is subject to shareholder approval?
A. Electionofofficers.
B. Removalofofficers.
C. Declaration of cash dividends. D. Removal of directors.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shareholders have the right to elect and remove directors through the voting process.
Choice "a" is incorrect. Officers are selected by the directors rather than by the shareholders. Choice "b" is incorrect. Because officers are selected by the directors, generally they may be removed only by the directors.
Choice "c" is incorrect. Dividends generally can be declared only by the directors; shareholders usually do not have any right to declare or vote on a distribution.
QUESTION 81
Which of the following is a requirement for a small business corporation to elect S corporation status?
A. Ithasonlyoneclassofstock.
B. Ithasatleastonepartnershipasashareholder. C. It has international ownership.
D. It has more than 75 shareholders.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A corporation may elect to be taxed like a partnership under Subchapter S only if it has only one class of stock.
Choice "b" is incorrect. A corporation can elect S corporation status only if its shareholders are individuals, estates, or certain types of trusts.
Choice "c" is incorrect. Foreign shareholders generally are prohibited in an S corporation. Choice "d" is incorrect. An S corporation can have up to 100 shareholders, but it may have fewer.
QUESTION 82
The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?
A. CertificateofIncorporation. B. Charter.
C. Bylaws.
D. Proxystatement.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The bylaws usually contain the rules for running the corporation. Choices "a" and "b" are incorrect. These are possible choices, but not as good an answer as "c". A corporation's articles of incorporation (called a charter in a few states) must set out certain information relevant to formation of the corporation, but it may include any other information that it is not illegal. However, usually details about intracorporate power are set out in bylaws rather than in the articles or charter.
Choice "d" is incorrect. A proxy statement is a request to shareholders to allow their shares to be voted by a specified person in a specified way. It has nothing to do with a corporate president's authority.
Supplemental Questions
QUESTION 83
A limited liability company taxed under subchapter K of the Internal Revenue Code (the partnership subchapter): A. Mustpayfederalincometax.
B. Isgenerallynotconsideredalegalentityseparateandapartfromitsowners. C. Must have written articles of organization.
D. Must provide for apportionment of liability for the company's debts.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A limited liability company must have written articles of organization, which must be filed with the state.
Choice "a" is incorrect. An LLC taxed under subchapter K of the Internal Revenue Code (the partnership subchapter) does not pay federal income tax; the members are taxed on their share of the LLC's income.
Choice "b" is incorrect. Unlike a general partnership, but like a corporation and a limited partnership, an LLC is considered a legal entity separate and apart from its owners. Choice "d" is incorrect. An LLC does not have to provide for apportionment of liability for LLC debts; the members of an LLC have limited liability.
QUESTION 84
A partnership agreement must be in writing if:
A. Anypartnercontributesmorethan$500incapital.
B. Thepartnersresideindifferentstates.
C. The partnership intends to own real estate.
D. The partnership's purpose cannot be completed within one year of formation.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Under the statute of frauds, a partnership agreement must be in writing if by its terms the agreement cannot be completed within one year. Choice "a" is incorrect. No such rule. Although the statute of frauds requires a contract for the sale of goods for $500 or more to be evidenced by a writing, a writing is not required to contribute more than $500 in capital to a partnership.
Choice "b" is incorrect. No such rule, a far out distracter. Choice "c" is incorrect. While a contract to buy or sell real estate will require a writing, a partnership agreement to own/buy real estate need not be in writing.
QUESTION 85
Unless prohibited by the organization documents, a stockholder in a publicly held corporation and the owner of a limited partnership interest both have the right to:
A. Ownershipofthebusiness'assets. B. Controlmanagementofthebusiness. C. Assign their interest in the business. D. An investment that has perpetual life.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Both a shareholder in a publicly held corporation and the owner of a limited partnership interest have a right to assign (sell) their interest. While a shareholder is free to assign his whole ownership interest, a limited partner's assignable interest is limited to the limited partner's interest in profits and losses.
Choice "a" is incorrect. Neither the stockholder of a publicly held corporation nor the owner of a limited partnership interest (or indeed, even a general partnership interest) has an ownership interest in any item of the business' assets--the assets belong to the business and not to the owners of the business. Choice "b" is incorrect. Stockholders and limited partners generally do not have the right to participate in the management of the business.
Choice "d" is incorrect. A limited partnership interest dissolves upon death of the limited partner and so is not a perpetual investment.
QUESTION 86
Price owns 2,000 shares of Universal Corp.'s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paiD. If Universal is dissolved, which of the following statements is correct?
A. UniversalwillbeliabletoPriceasanunsecuredcreditorfor$10,000.
B. UniversalwillbeliabletoPriceasasecuredcreditorfor$20,000.
C. Price will have priority over the claims of Universal's bond owners.
D. Price will have priority over the claims of Universal's unsecured judgment creditors.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other "unsecured" debts.
Choice "b" is incorrect. The unpaid dividend ranks as an "unsecured" not a "secured" debt and Price has no right to a dividend for the second year because no dividend was declared that year. Choice "c" is incorrect. As an "unsecured" creditor, Price does not have priority over the company's bondholders.
Choice "d" is incorrect. The "unsecured" creditors will share in the "unsecured" category as a whole and not with any priority within the class.
QUESTION 87
A stockholder's right to inspect books and records of a corporation will be properly denied if the stockholder:
A. Wantstousecorporatestockholderrecordsforapersonalbusiness. B. Employsanagenttoinspectthebooksandrecords.
C. Intends to commence a stockholder's derivative suit.
D. Is investigating management misconduct.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. This right will be properly denied where the purpose is not reasonably related to their status as a shareholder. Choice "b" is incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. A shareholder need not conduct the inspection personally; a shareholder may send an agent such as an attorney or an accountant.
Choices "c" and "d" are incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. Choices "c" and "d" are purposes reasonably related to the shareholder's status as a shareholder. Thus, the stockholder would have a right to inspect for those reasons.
QUESTION 88
Generally, a merger of two corporations requires:
A. Thataspecialmeetingbeheldandthatnoticeandcopyofthemergerplanbegiventoallstockholdersofbothcorporations. B. Unanimousapprovalofthemergerplanbythestockholdersofbothcorporations.
C. Unanimous approval of the merger plan by the boards of both corporations.
D. That all liabilities owed by the absorbed corporation be paid before the merger.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The merger of two corporations requires that a special meeting be held and that notice and copy of the merger plan be given to all stockholders of both companies. A merger generally requires the approval of both the directors and stockholders. Choice "b" is incorrect. While the stockholders' approval is required, in most states a majority vote is required; no state requires a unanimous vote.
Choice "c" is incorrect. While the board's approval is required, a majority vote and not a unanimous vote is required.
Choice "d" is incorrect. There is no requirement that all liabilities owed by the absorbed corporation be paid before the merger because the merged corporation becomes obligated to pay such liabilities upon the merger.
QUESTION 89
In a member managed LLC, the apparent authority of a member to bind the LLC in dealing with third parties:
A. WouldpermitamembertosubmitaclaimagainsttheLLCtoarbitration.
B. Mustbederivedfromtheexpresspowersandpurposescontainedintheoperatingagreement.
C. Will be effectively limited by a formal resolution of the members of which third parties are aware. D. Will be effectively limited by a formal resolution of the members of which third parties are unaware.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. This is really an agency question on apparent authority. Apparent authority is authority that a third party reasonably believes an agent has. If the third party is aware of a restriction on the agent's authority, the third party cannot reasonably believe that the agent has the restricted authority.
Choice "a" is incorrect. Submitting a claim to arbitration is an extraordinary act and so is not within a member's apparent authority.
Choice "b" is incorrect. Apparent authority is derived from what the reasonable person believes is the authority of a member, not the express powers and purposes contained in the operating agreement. Choice "d" is incorrect. A formal resolution of the members will not be effective to destroy apparent authority if third parties are unaware of the resolution.
QUESTION 90
Unless otherwise provided in a general partnership agreement, which of the following statements is correct when a partner dies?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. "No - No - No."
Upon the death of a general partner:
Rule: A partner's death is an event of dissociation. Where a partner dissociates, the partner's right to participate in the management ceases; the partner's executor does not take the partner's place. Rule: The partner's estate remains liable for the partner's obligations to the partnership and has a right to the deceased partner's share of distributions.
Rule: Under the Revised Uniform Partnership Act, a partnership does not automatically dissolve on the death of a partner; rather it will dissolve only if 90 days pass and the remaining partners do not wish to continue the partnership.
Choices "a", "b", and "c" are incorrect, per the above rules.
Which of the following statements is(are) correct regarding the methods a target corporation may use to ward off a takeover attempt?
A. Thetargetcorporationmaymakeanoffer("self-tender")toacquirestockfromitsownshareholders.
II. The target corporation may seek an injunction against the acquiring corporation on the grounds that the attempted takeover violates federal antitrust law.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Rule: A tender offer is a general invitation by a bidder to the shareholders of a target company to tender their shares to the bidder at a specified price during a specified time. A target of a takeover may ward off a tender offer by offering to repurchase shares from its shareholders. If a takeover will violate federal antitrust law, a court will enjoin the takeover. Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 51
Acorn Corp. wants to acquire the entire business of Trend Corp. Which of the following methods of business combination will best satisfy Acorn's objectives without requiring the approval of the shareholders of either corporation?
A. AmergerofTrendintoAcorn,wherebyTrendshareholdersreceivecashorAcornshares.
B. AsaleofalltheassetsofTrend,outsidetheregularcourseofbusiness,toAcorn,forcash.
C. An acquisition of all the shares of Trend through a compulsory share exchange for Acorn shares.
D. A cash tender offer, whereby Acorn acquires at least 90% of Trend's shares, followed by a short- form merger of Trend into Acorn.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A parent corporation owning 90% or more of a subsidiary may merge the subsidiary (short form merger) into the parent without the approval of the shareholders of either corporation or the approval of the subsidiary's board.
Choices "a", "b", and "c" all require at least one of the corporations to follow the general procedure for fundamental corporate changes (i.e., board resolution notice, approval by majority shares, and filing).
QUESTION 52
Under the Revised Model Business Corporation Act, which of the following must be contained in a corporation's articles of incorporation?
A. Quorumvotingrequirements.
B. Namesofstockholders.
C. Provisions for issuance of par and nonpar shares.
D. The number of shares the corporation is authorized to issue.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The articles must set out the corporation's authorized shares. Choice "a" is incorrect. Quorum requirements, if stated at all, usually are in the bylaws; they need not be included in the articles of incorporation.
Choice "b" is incorrect. The articles need not include the names of stockholders. Choice "c" is incorrect. The RMBCA has eliminated the concept of par value and so does not have a requirement that par value be established in the articles.
QUESTION 53
Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following, except:
A. Aformalplanofmerger.
B. Anaffirmativevotebytheholdersofamajorityofeachcorporation'svotingshares. C. Receipt of voting stock by all stockholders of the original corporations.
D. Approval by the board of directors of each corporation.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A merger can be effected by giving some parties cash or property; not everyone need receive voting shares.
Choice "a" is incorrect. The merger must be pursuant to a formal plan. Choice "b" is incorrect. The majority of each corporation generally must approve a merger. Choice "d" is incorrect. A plan of merger must be approved by the boards of the merging corporations.
QUESTION 54
Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter?
A. Provisionfortheauthorizationofvotingstock. II. Name of the corporation.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Both I and II.
Rule: In order to obtain a corporate charter, a for-profit corporation must include in its articles of incorporation the name of the corporation and a provision for the authorization of voting stock. In addition, the articles of incorporation must include the names of the incorporators and the name and address of the registered agent.
Choices "a", "b", and "d" are incorrect, per the above rule.
QUESTION 55
Generally, a corporation's articles of incorporation must include all of the following, except the:
A. Nameofthecorporation'sregisteredagent. B. Nameofeachincorporator.
C. Number of authorized shares.
D. Quorum requirements.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A corporation's articles of incorporation need not contain any information regarding quorum requirements.
Choices "a", "b", and "c" are incorrect because under the Revised Model Business Corporations Act a corporation's articles of incorporation must include: (1) The name of the corporation,
(2) The name and address of the corporation's registered agent, (3) The names and addresses of each of the incorporators, and (4) The number of shares authorized to be issued.
QUESTION 56
Which of the following actions may a corporation take without its stockholders' consent?
A. Consolidatewithoneormorecorporations. B. Mergewithoneormorecorporations.
C. Dissolve voluntarily.
D. Purchase 55% of another corporation's stock.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Directors are free to make most corporate decisions unilaterally. However, decisions that might fundamentally change the nature of the corporation require the consent of the shareholders. The purchase of 55% of another corporation's stock can be quite insignificant to the purchaser and is not a fundamental corporate change.
Choice "a" is incorrect because a consolidation is a fundamental corporate change. Choice "b" is incorrect because a merger is a fundamental corporate change. Choice "c" is incorrect because a dissolution is a fundamental corporate change.
QUESTION 57
Absent a specific provision in its articles of incorporation, a corporation's board of directors has the unilateral power to do all of the following, except: A. Repealthebylaws.
B. Declaredividends.
C. Fix compensation of directors.
D. Amend the articles of incorporation.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders. Choice "a" is incorrect. The directors ordinarily have the power to repeal bylaws unless the articles or the specific bylaw to be repealed provides otherwise.
Choice "b" is incorrect. The directors have the power to declare dividends at their discretion as long as the dividends do not violate any statute, article provision, bylaw, or contract with a creditor. Choice "c" is incorrect. Although it seems like there would be a conflict of interest, directors do have the power to set their own compensation, limited only by the fiduciary duties owed to the corporation (e.g., the directors cannot set salaries so high as to constitute waste).
QUESTION 58
Carr Corp. declared a 7% stock dividend on its common stock. The dividend:
A. MustberegisteredwiththeSECpursuanttotheSecuritiesActof1933.
B. Isincludableinthegrossincomeoftherecipienttaxpayersintheyearofreceipt. C. Has no effect on Carr's earnings and profits for federal income tax purposes.
D. Requires a vote of Carr's stockholders.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A stock dividend means that the corporation issues its existing shareholders more stock. In essence, the corporation is merely diluting the proportional ownership interest of existing shares. This has no effect on the corporation's earnings and profits for federal income tax purposes. Choice "a" is incorrect. There is no requirement that stock dividends be registered with the SEC because no "sale" is involved.
Choice "b" is incorrect. The receipt of a stock dividend is not the recognition of income. It merely divides the stockholders' current ownership interests into more pieces; it does not increase proportional ownership interest in the corporation.
Choice "d" is incorrect. The issuance of dividends, including stock dividends, is at the directors' discretion; shareholders do not vote on dividends.
QUESTION 59
Which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled to?
A. Conversionofthepreferredstockintocommonstock.
B. Votingrights.
C. Dividend carryovers from years in which dividends were not paid, to future years. D. Guaranteed dividends.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year.
Choice "a" is incorrect. There is no right to convert preferred shares into common stock unless that right is specifically granted.
Choice "b" is incorrect. Preferred stock need not have voting rights. Choice "d" is incorrect. Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.
QUESTION 60
Under the Revised Model Business Corporation Act, a dissenting stockholder's appraisal right generally applies to which of the following corporate actions?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Business Environment and Concepts (Volume A)
Explanation Explanation/Reference:
Explanation:
Choice "a" is correct. "Yes-Yes."
Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right.
Rule: A short-form merger is when a parent mergers a 90% or more owned subsidiary into the parent. In this case, only the shareholders of the subsidiary have dissenting rights. Choices "b", "c", and "d" are incorrect, per the above rules.
QUESTION 61
Which of the following actions may be taken by a corporation's board of directors without stockholder approval?
A. Purchasingsubstantiallyalloftheassetsofanothercorporation. B. Sellingsubstantiallyallofthecorporation'sassets.
C. Dissolving the corporation.
D. Amending the articles of incorporation.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Purchasing substantially all the assets of another corporation does not require approval of the buyer's stockholders. Such a transaction would be relatively insignificant if a large corporation purchased substantially all the assets of a much smaller corporation. Choice "b" is incorrect. Selling substantially all of the corporation's assets is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval. Choice "c" is incorrect. Dissolving the corporation is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval.
Choice "d" is incorrect. Amending the articles of incorporation is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval.
QUESTION 62
To which of the following rights is a stockholder of a public corporation entitled?
A. Therighttohaveannualdividendsdeclaredandpaid.
B. Therighttovotefortheelectionofofficers.
C. The right to a reasonable inspection of corporate records.
D. The right to have the corporation issue a new class of stock.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Stockholders have a right to inspect certain corporate records. Choice "a" is incorrect. Declaration of dividends is within the directors' discretion. There is no absolute right of shareholders to receive annual dividends.
Choice "b" is incorrect. Officers are appointed by the directors; they are not elected by the shareholders.
Choice "d" is incorrect. Shareholders do not have a right to force the corporation to issue a new class of stock.
QUESTION 63
A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?
A. Thesubsidiarycorporation'sboardofdirectorsmustpassamergerresolution.
B. Thesubsidiarycorporation'sdissentingstockholdersmustbegivenanappraisalremedy. C. The parent corporation's stockholders must approve the merger.
D. The parent corporation's dissenting stockholders must be given an appraisal remedy.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy.
Choice "a" is incorrect. The subsidiary's board is not required to take any action in a short-form merger. Choice "c" is incorrect. The parent corporation's shareholders have no right to approve or disapprove a short-form merger.
Choice "d" is incorrect. The parent corporation's shareholders have no right to dissent to a short-form merger.
QUESTION 64
Davis, a director of Active Corp., is entitled to:
A. Serveontheboardofacompetingbusiness.
B. TakesoleadvantageofabusinessopportunitythatwouldbenefitActive. C. Rely on information provided by a corporate officer.
D. Unilaterally grant a corporate loan to one of Active's shareholders.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. As a director of the corporation Davis may rely on information provided to him/her by a corporate officer. A corporate director is under no obligation to verify information given to him by management (corporate officers).
Choice "a" is incorrect. A director is not entitled to serve on the board of a competing business. Doing so would be a breach of fiduciary duty.
Choice "b" is incorrect. A director may not take sole advantage of a business opportunity that would benefit the corporation. Doing so would be a breach of fiduciary duty. Choice "d" is incorrect. A director may not unilaterally grant a corporate loan to one of the corporation's shareholders. Directors generally must act through a majority vote at a directors' meeting.
QUESTION 65
Knox, president of Quick Corp., contracted with Tine Office Supplies, InC. to supply Quick's stationery on customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick's board of directors that Knox was a majority stockholder in Tine. Quick's contract with Tine is:
A. VoidbecauseofKnox'sself-dealing.
B. Voidbecausethedisclosurewasmadeafterexecutionofthecontract. C. Valid because of Knox's full disclosure.
D. Valid because the contract is fair to Quick.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders, who then approve the transaction, or the director can prove that the transaction was fair to the corporation. The stationery purchase was fair to Quick, since it was purchased at a below-market price. Thus, the contract is valid. Choice "a" is incorrect. A director's self-dealing does not automatically make a contract voiD. The contract can be upheld if it was fair.
Choice "b" is incorrect. A director's self-dealing does not automatically make a contract voiD. The contract can be upheld if it was fair.
Choice "c" is incorrect. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director
makes full disclosure of all of the facts to the disinterested directors or shareholders, who then approve the transaction, or the director can prove that the transaction was fair. Mere disclosure after the contract was adopted does not automatically render the contract valid.
QUESTION 66
A stockholder's right to inspect books and records of a corporation will be properly denied if the purpose of the inspection is to:
A. Commenceastockholder'sderivativesuit.
B. Obtainstockholdernamesforaretailmailinglist.
C. Solicit stockholders to vote for a change in the board of directors. D. Investigate possible management misconduct.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes related to the stockholder's interest in the corporation. This right will be denied where the purpose is not reasonably related to their status as a shareholder. Obtaining stockholder names to create a retail mailing list is a personal purpose. Choices "a", "c", and "d" are incorrect. The following reasons for shareholders to inspect the books of the corporation are reasonably related to their status as shareholders:
A. To commence a stockholder's derivative suit.
C. To solicit stockholders to vote for a change in the board of directors. D. To investigate possible management misconduct.
QUESTION 67
Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?
A. Assignment.
B. Novation.
C. Delegation.
D. Accord and satisfaction.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A promoter is personally liable for the contracts he or she enters into prior to incorporation. A corporation may become liable by adoption of the contract, and through the process of novation (an agreement among all of the parties), the promoter may be released from contractual obligations.
Choice "a" is incorrect. An assignment is a transfer of a contractual duty to perform. After the transfer, both the assignor and assignee may be held liable for performance. The assignor is not, thereby, released from liability.
Choice "c" is incorrect. A delegation is a transfer of a contractual duty to perform. Both the delegor and delegee are liable to perform after the assignment; it does not release the promoter from liability. Choice "d" is incorrect. An accord is an agreement to change the performance due under a contract. Once the new terms are performed or satisfied, the original contract terms are terminated. Such an agreement does not automatically result in release of a promoter.
QUESTION 68
Which of the following parties is liable to repay an illegal distribution to a corporation?
A. Adirectornotbreachinghisorherdutyinapprovingthedistributionandthecorporationissolvent. B. Adirectornotbreachinghisorherdutyinapprovingthedistributionandthecorporationisinsolvent. C. A shareholder not knowing of the illegality of the distribution and the corporation is solvent.
D. A shareholder knowing of the illegality of the distribution and the corporation is insolvent.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Illegal dividends from an insolvent company must be repaid to the corporation for the benefit of the creditors. A shareholder who knowingly accepts an illegal dividend is liable to return it.
Choices "a" and "b" are incorrect. If a director does not breach any duties in approving a distribution, the director is protected by the business judgment rule and is not liable for the distribution whether the corporation is solvent or insolvent.
Choice "c" is incorrect. A shareholder of a solvent corporation who unknowingly accepts an illegal distribution is not obligated to repay the distribution.
QUESTION 69
Which of the following may not own shares in an S corporation?
A. Individuals. B. Estates.
C. Trusts.
D. Corporations.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shareholders must be individuals, estates, or certain trusts. Corporations are not permitted to be shareholders of an S corporation. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 70
Which of the following decreases stockholder equity?
A. Investmentsbyowners.
B. Distributionstoowners.
C. Issuance of stock.
D. Acquisition of assets in a cash transaction.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Distributions to owners, typically in the form of dividends, will serve to reduce stockholders' equity.
Choice "a" is incorrect. Investments by owners, typically in the form of stock purchases or contributions, will serve to increase shareholders' equity. Choice "c" is incorrect. Issuance of stock by sale will increase shareholders' equity, while issuance of stock dividends will have no effect on total shareholders' equity. Stock dividends will reduce the book value of each share outstanding.
Choice "d" is incorrect. Acquisition of assets with cash will have no effect on total stockholders' equity. The acquisition of assets with cash will effectively reclassify assets from one type to another without impacting liabilities or equity.
QUESTION 71
Food Corp. owned a restaurant called The Ambers. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, "T.J. Jones for The Ambers." Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paiD. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.?
A. ItisnotliablebecauseJonesisliable.
B. Itisnotliablebecausethecorporationwasanundisclosedprincipal. C. It is liable because Jones is not liable.
D. It is liable because Jones had authority to make the contract.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Where an agent enters into a contract on behalf of a principal and discloses the existence and identity of the principal and acts with authority, the principal is liable and the agent is not liable. Here, Jones signed the contract with an indication that he was signing for the corporation. The president of a corporation is an agent of the corporation and has apparent authority to enter contracts that appear to be within the ordinary scope of the corporation's business. The restaurant repairs here appear to be with the scope of Food Corp.'s business. Therefore, Food Corp. will be bound because Jones had at least apparent authority.
Choice "a" is incorrect, per the rule stated above.
Choice "b" is incorrect. The president signed as acting on behalf of the corporation, thus disclosing the principal. Choice "c" is incorrect, per the rule stated above.
QUESTION 72
Which of the following statements describes the same characteristic for both an S corporation and a C corporation?
A. Bothcorporationscanhavemorethan100shareholders.
B. Bothcorporationshavethedisadvantageofdoubletaxation.
C. Shareholders can contribute property into a corporation without being taxed. D. Shareholders can be either citizens of the United States or foreign countries.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Either entity's shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the directors. Choice "a" is incorrect. An S corporation may not have more than 100 shareholders, although a C corporation may have as many shareholders as desired.
Choice "b" is incorrect. Only the C corporation is subject to the double taxation disadvantage. Choice "d" is incorrect. Only an S corporation is prohibited from having foreign country shareholders.
QUESTION 73
Smith was an officer of CCC Corp. As an officer, the business judgment rule applies to Smith in which of the following ways?
A. BecauseSmithisnotadirector,theruledoesnotapply.
B. IfSmithmakes,ingoodfaith,aseriousbuthonestmistakeinjudgment,SmithisgenerallynotliabletoCCCfordamagescaused.
C. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
D. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages. Choices "a", "c", and "d" are incorrect, per the above rule.
QUESTION 74
In which type of business entity is the entire ownership interest most freely transferable?
A. Generalpartnership.
B. Limitedpartnership.
C. Corporation.
D. Limitedliabilitycompany.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Among the business entities listed, entire ownership interests are most freely transferable in a corporation. Unless transferability is restricted by contract (restricted shares or voting trusts or voting agreements), there are no restrictions on the sale of corporate stock (the common stock represents the stockholders' ownership interest). The right to transfer ownership interests freely is one of the advantages of the corporate form of business.
Choice "a" is incorrect. A general partner in a general partnership may assign his or her right to receive profits or surplus. A general partner cannot assign his interest and confer partnership status on the assignee without unanimous consent of all other partners. Choice "b" is incorrect. Both general partners and limited partners in a limited partnership may assign the right to receive profits and surplus. Neither general nor limited partners can confer general or limited partnership status on the assignee without the unanimous consent of all general and all limited partners.
Choice "d" is incorrect. In most states, limited liability company (LLC) members may not sell and confer ownership interest without the consent of all LLC members.
QUESTION 75
Which of the following statements is correct regarding both debt and common shares of a corporation?
A. Commonsharesrepresentanownershipinterestinthecorporation,butdebtholdersdonothaveanownershipinterest. B. Commonshareholdersanddebtholdershaveanownershipinterestinthecorporation.
C. Common shares typically have a fixed maturity date, but debt does not.
D. Common shares have a higher priority on liquidation than debt.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation.
Choice "b" is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation.
Choice "c" is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards.
Choice "d" is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first. After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.
QUESTION 76
Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?
A. Theentitymayavoidtaxation.
B. Theentitymayhaveanynumberofowners.
C. The owner may participate in management while limiting personal liability.
D. The entity may make disproportionate allocations and distributions to members.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A member in a limited liability company has limited liability and the ability to manage, while a partner in a general partnership has full liability and the ability to manage. Choice "a" is incorrect. Generally, both entities' profits are taxable at the ownership level, but a Limited Liability Company may be taxed as an entity if it so elects. Choice "b" is incorrect. Both entities may have any number of owners. Choice "d" is incorrect. Both entities may make disproportionate allocations and distributions to their owners.
QUESTION 77
Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation?
A. Aleveragedbuyoutofassets.
B. Anacquisitionofstockfordebtsecurities. C. A cash tender offer.
D. A merger.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A merger involves one corporation joining with another corporation. The surviving corporation has all of the rights and liabilities of the merged corporation. Thus, the acquiring corporation automatically becomes liable for all obligations of the acquired corporation. Choice "a" is incorrect. A leveraged buyout is a strategy involving the acquisition of another corporation using a significant amount of borrowed money (bonds or loans). Often, the assets of the corporation being acquired are used as collateral for the loans (in addition to the assets of the acquiring corporation).
The acquiring corporation does not automatically become liable for all (or any) obligations of the acquired corporation if it merely acquires another corporation's assets. Choice "b" is incorrect. An acquisition of stock for debt securities does not make the acquiring corporation liable for the obligations of the acquired corporation. The acquiring corporation has simply purchased stock. In an acquisition of stock for debt securities, the acquired corporation becomes a subsidiary of the acquiring corporation and the acquired corporation remains a separate entity liable for its own obligations.
Choice "c" is incorrect. A cash tender offer is an offer to purchase a corporation's stock directly from its shareholders at a specified price for a specified period of time. In a cash tender offer, the acquiring corporation does not automatically become liable for all obligations of the acquired corporation. In fact, if there is only an offer, there is no transaction at all.
QUESTION 78
Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?
A. Anindependentappraisermustrendertotheboardofdirectorsafairnessopiniononthecontract.
B. Thedirectormustdisclosetheinteresttotheindependentmembersoftheboardandrefrainfromvoting. C. The shareholders must review and ratify the contract.
D. The director must resign from the board of directors.
Correct Answer: B
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "b" is clearly the best answer here, although it is not completely correct. Directors owe their corporation a duty of loyalty and must act solely in the best interests of the corporation. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders who then approve the transaction, or the transaction is fair. Thus, disclosing the interest to the independent members and refraining from voting is one way to ensure the validity of a contract between a director and his or her corporation, but it technically is not required as disclosure to and approval by the shareholders also ensures validity, as does making sure the transaction is fair to the corporation. Nevertheless, the other choices are clearly incorrect - making this the best choice. Choice "a" is incorrect. A transaction with an interested director will be upheld if it is fair, but it is not necessary to hire an independent appraiser to prove fairness. Choice "c" is incorrect. One method of approving a contract with an interested director is to disclose all of the material facts to the shareholders and seek their approval. Merely allowing the shareholders to review the contract is not sufficient.
Choice "d" is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the director to resign from the board (i.e., a director is not required to resign because of a conflict of interest). The corporation can approve the conflict if it is disclosed and the director does not participate in the approval process.
QUESTION 79
Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock?
A. Astockdividendisprohibitedinsuchacorporation.
B. Astockdividendincreasesastockholder'sproportionateshareofcorporateownership.
C. A stock dividend causes a decrease in the assets of the corporation.
D. A stock dividend is a corporation's ratable distribution of additional shares of stock to its stockholders.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Stock dividends are dividends in the corporation's own authorized but unissued shares given to existing shareholders on account of their shares. Choice "a" is incorrect. Despite the fact that a stock dividend in a corporation with only one class of par value stock does not change a shareholder's proportional ownership or affect capitalization of the corporation, nothing prohibits a corporation--even a corporation with only one class of par value stock--from declaring a stock dividend.
Choice "b" is incorrect. With a stock dividend, when there is only one class of stock, each shareholder receives a proportionate amount of stock, resulting in each shareholder owning the same percentage of the corporation after the dividend is issued as he or she owned before the dividend was issued. Choice "c" is incorrect. When a stock dividend is issued in a corporation's own stock, no assets are distributed and the solvency of the corporation remains the same.
QUESTION 80
Which of the following corporate actions is subject to shareholder approval?
A. Electionofofficers.
B. Removalofofficers.
C. Declaration of cash dividends. D. Removal of directors.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Shareholders have the right to elect and remove directors through the voting process.
Choice "a" is incorrect. Officers are selected by the directors rather than by the shareholders. Choice "b" is incorrect. Because officers are selected by the directors, generally they may be removed only by the directors.
Choice "c" is incorrect. Dividends generally can be declared only by the directors; shareholders usually do not have any right to declare or vote on a distribution.
QUESTION 81
Which of the following is a requirement for a small business corporation to elect S corporation status?
A. Ithasonlyoneclassofstock.
B. Ithasatleastonepartnershipasashareholder. C. It has international ownership.
D. It has more than 75 shareholders.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A corporation may elect to be taxed like a partnership under Subchapter S only if it has only one class of stock.
Choice "b" is incorrect. A corporation can elect S corporation status only if its shareholders are individuals, estates, or certain types of trusts.
Choice "c" is incorrect. Foreign shareholders generally are prohibited in an S corporation. Choice "d" is incorrect. An S corporation can have up to 100 shareholders, but it may have fewer.
QUESTION 82
The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?
A. CertificateofIncorporation. B. Charter.
C. Bylaws.
D. Proxystatement.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The bylaws usually contain the rules for running the corporation. Choices "a" and "b" are incorrect. These are possible choices, but not as good an answer as "c". A corporation's articles of incorporation (called a charter in a few states) must set out certain information relevant to formation of the corporation, but it may include any other information that it is not illegal. However, usually details about intracorporate power are set out in bylaws rather than in the articles or charter.
Choice "d" is incorrect. A proxy statement is a request to shareholders to allow their shares to be voted by a specified person in a specified way. It has nothing to do with a corporate president's authority.
Supplemental Questions
QUESTION 83
A limited liability company taxed under subchapter K of the Internal Revenue Code (the partnership subchapter): A. Mustpayfederalincometax.
B. Isgenerallynotconsideredalegalentityseparateandapartfromitsowners. C. Must have written articles of organization.
D. Must provide for apportionment of liability for the company's debts.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A limited liability company must have written articles of organization, which must be filed with the state.
Choice "a" is incorrect. An LLC taxed under subchapter K of the Internal Revenue Code (the partnership subchapter) does not pay federal income tax; the members are taxed on their share of the LLC's income.
Choice "b" is incorrect. Unlike a general partnership, but like a corporation and a limited partnership, an LLC is considered a legal entity separate and apart from its owners. Choice "d" is incorrect. An LLC does not have to provide for apportionment of liability for LLC debts; the members of an LLC have limited liability.
QUESTION 84
A partnership agreement must be in writing if:
A. Anypartnercontributesmorethan$500incapital.
B. Thepartnersresideindifferentstates.
C. The partnership intends to own real estate.
D. The partnership's purpose cannot be completed within one year of formation.
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Under the statute of frauds, a partnership agreement must be in writing if by its terms the agreement cannot be completed within one year. Choice "a" is incorrect. No such rule. Although the statute of frauds requires a contract for the sale of goods for $500 or more to be evidenced by a writing, a writing is not required to contribute more than $500 in capital to a partnership.
Choice "b" is incorrect. No such rule, a far out distracter. Choice "c" is incorrect. While a contract to buy or sell real estate will require a writing, a partnership agreement to own/buy real estate need not be in writing.
QUESTION 85
Unless prohibited by the organization documents, a stockholder in a publicly held corporation and the owner of a limited partnership interest both have the right to:
A. Ownershipofthebusiness'assets. B. Controlmanagementofthebusiness. C. Assign their interest in the business. D. An investment that has perpetual life.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Both a shareholder in a publicly held corporation and the owner of a limited partnership interest have a right to assign (sell) their interest. While a shareholder is free to assign his whole ownership interest, a limited partner's assignable interest is limited to the limited partner's interest in profits and losses.
Choice "a" is incorrect. Neither the stockholder of a publicly held corporation nor the owner of a limited partnership interest (or indeed, even a general partnership interest) has an ownership interest in any item of the business' assets--the assets belong to the business and not to the owners of the business. Choice "b" is incorrect. Stockholders and limited partners generally do not have the right to participate in the management of the business.
Choice "d" is incorrect. A limited partnership interest dissolves upon death of the limited partner and so is not a perpetual investment.
QUESTION 86
Price owns 2,000 shares of Universal Corp.'s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paiD. If Universal is dissolved, which of the following statements is correct?
A. UniversalwillbeliabletoPriceasanunsecuredcreditorfor$10,000.
B. UniversalwillbeliabletoPriceasasecuredcreditorfor$20,000.
C. Price will have priority over the claims of Universal's bond owners.
D. Price will have priority over the claims of Universal's unsecured judgment creditors.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other "unsecured" debts.
Choice "b" is incorrect. The unpaid dividend ranks as an "unsecured" not a "secured" debt and Price has no right to a dividend for the second year because no dividend was declared that year. Choice "c" is incorrect. As an "unsecured" creditor, Price does not have priority over the company's bondholders.
Choice "d" is incorrect. The "unsecured" creditors will share in the "unsecured" category as a whole and not with any priority within the class.
QUESTION 87
A stockholder's right to inspect books and records of a corporation will be properly denied if the stockholder:
A. Wantstousecorporatestockholderrecordsforapersonalbusiness. B. Employsanagenttoinspectthebooksandrecords.
C. Intends to commence a stockholder's derivative suit.
D. Is investigating management misconduct.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. This right will be properly denied where the purpose is not reasonably related to their status as a shareholder. Choice "b" is incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. A shareholder need not conduct the inspection personally; a shareholder may send an agent such as an attorney or an accountant.
Choices "c" and "d" are incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. Choices "c" and "d" are purposes reasonably related to the shareholder's status as a shareholder. Thus, the stockholder would have a right to inspect for those reasons.
QUESTION 88
Generally, a merger of two corporations requires:
A. Thataspecialmeetingbeheldandthatnoticeandcopyofthemergerplanbegiventoallstockholdersofbothcorporations. B. Unanimousapprovalofthemergerplanbythestockholdersofbothcorporations.
C. Unanimous approval of the merger plan by the boards of both corporations.
D. That all liabilities owed by the absorbed corporation be paid before the merger.
Correct Answer: A
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The merger of two corporations requires that a special meeting be held and that notice and copy of the merger plan be given to all stockholders of both companies. A merger generally requires the approval of both the directors and stockholders. Choice "b" is incorrect. While the stockholders' approval is required, in most states a majority vote is required; no state requires a unanimous vote.
Choice "c" is incorrect. While the board's approval is required, a majority vote and not a unanimous vote is required.
Choice "d" is incorrect. There is no requirement that all liabilities owed by the absorbed corporation be paid before the merger because the merged corporation becomes obligated to pay such liabilities upon the merger.
QUESTION 89
In a member managed LLC, the apparent authority of a member to bind the LLC in dealing with third parties:
A. WouldpermitamembertosubmitaclaimagainsttheLLCtoarbitration.
B. Mustbederivedfromtheexpresspowersandpurposescontainedintheoperatingagreement.
C. Will be effectively limited by a formal resolution of the members of which third parties are aware. D. Will be effectively limited by a formal resolution of the members of which third parties are unaware.
Correct Answer: C
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. This is really an agency question on apparent authority. Apparent authority is authority that a third party reasonably believes an agent has. If the third party is aware of a restriction on the agent's authority, the third party cannot reasonably believe that the agent has the restricted authority.
Choice "a" is incorrect. Submitting a claim to arbitration is an extraordinary act and so is not within a member's apparent authority.
Choice "b" is incorrect. Apparent authority is derived from what the reasonable person believes is the authority of a member, not the express powers and purposes contained in the operating agreement. Choice "d" is incorrect. A formal resolution of the members will not be effective to destroy apparent authority if third parties are unaware of the resolution.
QUESTION 90
Unless otherwise provided in a general partnership agreement, which of the following statements is correct when a partner dies?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Business Environment and Concepts (Volume A) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. "No - No - No."
Upon the death of a general partner:
Rule: A partner's death is an event of dissociation. Where a partner dissociates, the partner's right to participate in the management ceases; the partner's executor does not take the partner's place. Rule: The partner's estate remains liable for the partner's obligations to the partnership and has a right to the deceased partner's share of distributions.
Rule: Under the Revised Uniform Partnership Act, a partnership does not automatically dissolve on the death of a partner; rather it will dissolve only if 90 days pass and the remaining partners do not wish to continue the partnership.
Choices "a", "b", and "c" are incorrect, per the above rules.