Which of the following is not characteristic of a corporation?

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1. Which of the following is not characteristic of a
corporation?

a. The financial loss that a
stockholder may suffer from owning stock in a public company is
limited.
b. Cash dividends paid by a corporation are deductible as expenses
by the corporation.
c. A corporation can own property in its name.
d. Corporations are required to file federal income tax
returns.

2. Characteristics of a corporation include
a. Shareholders who are mutual agents
b. Direct management by the shareholders (owners)
c. Its inability to own property
d. Shareholders who have
limited liability

3. One of the main disadvantages of the corporate form is the
a. Professional management
b. Double taxation of dividends
c. Charter
d. Corporation must issue stock

4. Under the corporate form of business organization
a. Ownership rights are easily
transferred.
b. A stockholder is personally liable for the debts of the
corporation.
c. Stockholders’ acts can bind the corporation even though the
stockholders have not been appointed as agents of the
corporation.
d. Stockholders wishing to sell their corporation shares must get
the approval of other stockholders.

5. Those most responsible for the major policy decisions of a
corporation are the
a. Management.
b. Board of directors.
c. Employees.
d. Stockholders.

6. Stockholders’ equity
a. Is usually equal to cash on hand
b. Includes paid-in capital and liabilities
c. Includes retained earnings
and paid-in capital
d. Is shown on the income statement

7. The price at which a stock can be sold depends upon a number of
factors. Which statement below is not one of those factors?
a. The financial condition, earnings record, and dividend record of
the corporation
b. Investor expectations of the corporation’s earning power
c. How high the par value
d. General business and
economic conditions and prospects

8. Which of the following accounts below is reported in the paid-in
capital/stockholders’ equity section of the corporate balance
sheet?
a. Cash
b. Stock Dividends
c. Organizational Expenses
d. Preferred Stock

9. The excess of issue price over par of common stock is termed
a(n)
a. Discount
b. Income
c. Deficit
d. Premium

10. The charter of a corporation provides for the issuance of
100,000 shares of common stock. Assume that 60,000 shares were
originally issued and 10,000 were subsequently reacquired. What is
the number of shares outstanding?
a. 40,000
b. 70,000
c. 50,000
d. 60,000

11. On April 1, 10,000 shares of $5 par common stock were issued
at $22, and on April 7, 5,000 shares of $50 par preferred stock
were issued at $104. Journalize the entries for April 1 and 7.

Answer

General guidance

Concepts and reason
Corporation has separate legal entity. This means the corporation is separate from its owners. Thus, it is held liable for its own actions. Corporation has a perpetual succession for the foreseeable future.

Corporation can enter into contracts on its own. It has to pay taxes as legal person.

The board of directors will execute the day-to-day activities of the business on behalf of the shareholders.

Though a corporation have a perpetual life, it can end its legal life through a process called liquidation or winding up. In the process of winding up, the assets are sold and liabilities are discharged. The remaining amount if any is paid to shareholders.

Fundamentals

Journalizing is the process of recording the transactions from the source documents into a record called Journal. These transactions are recorded in the order of their date.

Journal entry is used to record occurrence of the transaction.

Common stock is the ordinary capital often referred as the ownership share of a corporation held by the stockholders. These shares will have voting rights.

Preferred stock is the capital often referred as the ownership share of a corporation held by the stockholders having preferential rights. These shares will have no voting rights.

Formula to calculate the stockholder’s equity is as follows:

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Stockholderss equity = Share capital + Retained earnings - Treasury shares

Step-by-step

Step 1 of 12

1.

Corporation pays the dividends to shareholders. These dividends are not shown as expenses on the income statement. Dividends are deducted from the retained earnings of the company and hence, it does not affect a company’s net income.

Thus, the cash dividends paid by a corporation are not deductible as expenses.

Hence, this is not a characteristic of a corporation.

Part 1

Cash dividends paid by a corporation are deductible as expenses by the corporation.

Since, a corporation has separate legal entity it can own property in its name, it has to file tax returns and pay taxes. The loss of corporation is limited and hence shareholders are not liable.

Step 2 of 12

2.

Corporation is managed by the board of directors on behalf of the shareholders. The loss of corporation is limited and hence shareholders are not liable.

Therefore, the shareholders have limited liability is one of the characteristics of the corporation.

Part 2

Shareholders who have limited liability

Thought the shareholders are the owners of the corporation, the day-to-day transactions are maintained by the board of directors. Shareholders or owners of a corporation have limited liability on the loss of the company.

Step 3 of 12

3.

One of the major disadvantages of corporation is the higher taxation of profits. The amount of dividends paid to shareholders is not deducted as expenses from the income of the corporation. Even it is taxable in the hands of the individual shareholders of the corporation.

Therefore, the double taxation of dividends are the main disadvantages of the corporation.

Part 3

Double taxation of dividends

Professional management and issuance of stock are the advantages of the corporation. Charter is a written document of the corporation. It specifies the objectives of the corporation. So, these are no the disadvantages of the corporation.

Step 4 of 12

4.

Corporate form of business organization allows the shareholders to transfer ownership rights easily without any restrictions. There is no need to obtain the approval of other stockholders.

Therefore, the ownership rights can be easily transferred.

Part 4

Ownership rights can be easily transferred.

Under corporation form of business the stockholders are not personally liable for the debts of the corporation. Stockholders cannot bind the corporation. Stockholders can sell their shares without requiring the approval of other shareholders.

Step 5 of 12

5.

Shareholders are the owners of the corporation. However, the business transactions are not managed by the shareholders. They appoint the board of directors to handle the day-to-day transactions of the business. This board of directors is responsible for making the major policy decisions and implementing them.

Therefore, the board of directors is most responsible for the major policy making of a corporation.

Part 5

Board of directors

Employees will have to implement the policies given by the management. Stockholders cannot interfere in the daily business transactions. Even management will follow the decisions taken by the board. So, the board of directors is responsible for the policy making.

Step 6 of 12

6.

Stockholder’s equity is calculated as the total assets minus total liabilities. It represents the amount of stake held by the stockholders in the firm. It is shown on the liabilities side of the balance sheet.

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Formula to calculate the stockholder’s equity is as follows:

Stockholderss equity = Share capital + Retained earnings - Treasury shares

Therefore, stockholder’s equity includes retained earnings and paid-in capital.

Part 6

Stockholder’s equity includes retained earnings and paid-in capital.

Stockholder’s equity is shown on liabilities side of the balance sheet. It includes the retained earnings and paid-in capital.

Step 7 of 12

7.

The factors which influence the price of a stock are the financial conditions of the company. The market price is also determined by the earnings and dividends of a company also. The normal rate of return in the prevailing industry is also one of the factors to be considered.

Par value of the stock is the nominal face value of the stock. Thus it has no impact on the selling price or market price of the stock.

Therefore, the high par value is not one of the factors to be considered.

Part 7

How High the par value

Par value of the stock is the value assigned to the stock at the time of initial issue of the stock by the company. It does not affect the market price of the stock.

Step 8 of 12

8.

Paid-in capital forms part of the stockholders’ equity.

Stockholders’ Equity has two categories:

a) Common Stock: It represents the money invested by the stockholders in the business.

b) Retained earnings: It represents the profits or earnings retained by the business for future use. Ending retained earnings balance is calculated by adding the net income to the opening retained earnings and deducting the dividends paid.

Therefore, the stock dividends issued will increase the paid-in capital of the company. Thus the paid-in capital includes the stock dividends account.

Part 8

Stock Dividends

Cash account will come on the asset side of the balance sheet. Organizational expenses come under the debit side of the income statement.

Preferred stock account does not form part of the Stockholders’ equity section. It belongs to preferred stockholders.

Step 9 of 12

9.

Par value of the stock is the nominal face value of the stock. Thus it has no impact on the selling price or market price of the stock.

Issue price is the price at which the shares are sold to the stockholders.

If a share is issued at a price higher than the par value of the common stock, then it is called as Premium.

Part 9

Premium

Amount received from the issue of stock is more than the par value assigned to that particular stock then it is regarded as stock issued at premium.

Step 10 of 12

10.

Charter is a written document of the corporation. It specifies the objectives of the corporation. It is also known as articles of the incorporation.

Authorized shares are the maximum number of shares that can be issued by the corporation.

Issued shares represent the number of shares actually issued to the public.

The shares which are subsequently reacquired shall be deducted from the shares originally issued.

Thus, the number of shares outstanding is$60,000-$10,000 = $50,000.

Part 10

50,000

A corporation is originally issued 60,000 shares. Then, it reacquired or bought back 10,000 shares. The brought back shares should be deducted from the originally outstanding shares. Thus there is decrease in the number of shares originally issued.

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Step 11 of 12

11.

Prepare the journal entry to record the issue of common stock as shown below:

Credit(s)
Debit ($)
$220,000
$50.000
Date Accounts title and Explanation
1-Apr Cash(10,000 x 22)
Common stock (10,000 x 5)
Pa

Part 11.1

Credit(s)
Debit ($)
$220,000
$50.000
Date Accounts title and Explanation
1-Apr Cash(10,000 x 22)
Common stock (10,000 x 5)
Pa

Cash is received when common stock is issued. So, debit cash account. Common stock is a part of stockholders’ equity. Hence, credit common stock account with par value. Difference between the par value and the issue price is credit to Paid-in capital in excess of par- Common stock account.

Step 12 of 12

Prepare the journal entry to record the issue of preferred stock as shown below:

Credit(S)
$250.000
Date Accounts title and Explanation
Debit ($)
7-Apr Cash(5,000 x 104)
$520,000
Preferred Stock (5,000 x 50

Part 11.2

Credit(S)
$250.000
Date Accounts title and Explanation
Debit ($)
7-Apr Cash(5,000 x 104)
$520,000
Preferred Stock (5,000 x 50

Cash is received when Preferred stock is issued. So, debit cash account. Preferred stock is a part of stockholders’ equity. Hence, credit Preferred stock account with par value. Difference between the par value and the issue price is credit to Paid-in capital in excess of par- Preferred stock account.

Answer

Part 1

Cash dividends paid by a corporation are deductible as expenses by the corporation.

Part 2

Shareholders who have limited liability

Part 3

Double taxation of dividends

Part 4

Ownership rights can be easily transferred.

Part 5

Board of directors

Part 6

Stockholder’s equity includes retained earnings and paid-in capital.

Part 7

How High the par value

Part 8

Stock Dividends

Part 9

Premium

Part 10

50,000

Part 11.1

Credit(s)
Debit ($)
$220,000
$50.000
Date Accounts title and Explanation
1-Apr Cash(10,000 x 22)
Common stock (10,000 x 5)
Pa

Part 11.2

Credit(S)
$250.000
Date Accounts title and Explanation
Debit ($)
7-Apr Cash(5,000 x 104)
$520,000
Preferred Stock (5,000 x 50


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