Accounting for Corporations Flashcards

Questions and Answers

What is one characteristic of a corporation?

Subject to few government regulations

Continuous life (correct)

Unlimited liability of stockholders

Ownership is non-transferable

What is double taxation in a corporation?

Corporation pays income tax and stockholders pay taxes on dividends (correct)

Stockholders pay taxes on both their salary and dividends

Stockholders pay tax only on earnings

Corporation only pays tax on earnings

What is one advantage of a corporation?

Limited liability of stockholders

Name a disadvantage of a corporation.

Government regulations Signup and view all the answers

What is the first step in forming a corporation?

Filing and application with the Secretary of State Signup and view all the answers

What are organization costs in a corporation?

Costs incurred in forming a corporation such as legal and promotional fees Signup and view all the answers

What rights do stockholders have?

Vote for the board of directors Signup and view all the answers

What is authorized stock?

The amount of stock a corporation can sell as indicated by its charter Signup and view all the answers

What determines the stock market price?

Interaction between buyers and sellers Signup and view all the answers

What does par value of stock represent?

The protection of corporate creditors Signup and view all the answers

What is the primary objective in accounting for the issuance of common stock?

To identify the sources of paid-in capital Signup and view all the answers

What is the journal entry when common stock is issued at par value?

Debit Cash, Credit Common Stock Signup and view all the answers

When issuing common stock with a price different from par value, what additional account is credited?

Paid-in Capital/Excess of Par Value Signup and view all the answers

Study Notes

Characteristics of a Corporation

Separate legal entity distinct from its owners.
Stockholders enjoy limited liability protection.
Ownership represented by transferable shares of capital stock.
Ability to raise capital through stock issuance.
Continuity of existence despite changes in ownership.
Management decisions made by an elected board of directors.
Subject to extensive government regulations and double taxation on earnings and dividends.

Advantages of a Corporation

Legal independence from owners, safeguarding personal assets.
Limited liability shields stockholders from corporate debts.
Ownership can be easily transferred through stock sales.
Unique capability to raise capital from investors.
Perpetual existence, unaffected by owner changes.
Professional management opportunities for enhanced operational efficiency.

Disadvantages of a Corporation

Separation between ownership (stockholders) and management, which may lead to conflicts.
Heavy government regulations that can impose constraints.
Double taxation incurred on corporate income and dividends.

Forming a Corporation

Initial step involves filing an application with the Secretary of State.
Obtaining a charter, also known as articles of incorporation.
Development of by-laws to govern internal operations and specify authority structures.

Organization Costs

Costs associated with corporate formation classified as organization costs.
These include legal fees, state fees, and marketing expenses.
Organization costs typically expensed in the period incurred due to uncertainty over future benefits.

Ownership Rights of Stockholders

Voting rights to elect the board of directors and approve significant corporate actions.
Entitlement to dividends, representing shares in corporate earnings.
Preemptive right to maintain ownership percentage during new stock issuances.
Right to share in company assets upon liquidation status (residual claim).

Stock Issue Considerations

Authorized stock reflects the limit on shares a corporation can sell, established by its charter.
Authorization does not require an accounting entry; no immediate effect on assets or equity.
Common stock can be issued directly to investors or through underwriters, with direct issuances more common in private companies.

Stock Market Price Information

Publicly traded company stocks listed on organized exchanges.
Share prices determined by supply and demand dynamics from buyers and sellers.
Market prices generally aligned with company earnings trends and dividends.

Par and No-Par Value Stocks

Par value stocks have a defined value assigned in the corporate charter, ensuring legal capital is retained.
No-par value stocks lack a predetermined value; total proceeds viewed as legal capital if no value is assigned.

Accounting for Common Stock Issues

Key goals include identifying sources of paid-in capital and differentiating between paid-in capital and retained earnings.

Issuing Par Value Common Stock for Cash and Journal Entry

When issue price equals par value:
- Debit Cash 1000
- Credit Common Stock 1000
When issue price exceeds par value:
- Debit Cash 5000
- Credit Common Stock 1000
- Credit Paid-in Capital in Excess of Par Value 4000

Description

Explore the essential characteristics of a corporation through this set of flashcards. Learn about separate legal existence, limited liability, and the structure of ownership in a corporation. Perfect for students looking to grasp the fundamentals of corporate accounting.