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AICPA CPA-Business Exam Questions
CPA Business Environment and Concepts (Page 20 )

Updated On: 28-Feb-2026
Page 20 of 107
PDF with 530 Questions

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?

  1. Assignment.
  2. Novation.
  3. Delegation.
  4. Accord and satisfaction.

Answer(s): B

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.



Which of the following parties is liable to repay an illegal distribution to a corporation?

  1. A director not breaching his or her duty in approving the distribution and the corporation is solvent.
  2. A director not breaching his or her duty in approving the distribution and the corporation is insolvent.
  3. A shareholder not knowing of the illegality of the distribution and the corporation is solvent.
  4. A shareholder knowing of the illegality of the distribution and the corporation is insolvent.

Answer(s): D

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.



Which of the following may not own shares in an S corporation?

  1. Individuals.
  2. Estates.
  3. Trusts.
  4. Corporations.

Answer(s): D

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.



Which of the following decreases stockholder equity?

  1. Investments by owners.
  2. Distributions to owners.
  3. Issuance of stock.
  4. Acquisition of assets in a cash transaction.

Answer(s): B

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.



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.?

  1. It is not liable because Jones is liable.
  2. It is not liable because the corporation was an undisclosed principal.
  3. It is liable because Jones is not liable.
  4. It is liable because Jones had authority to make the contract.

Answer(s): D

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.






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