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Questions and Answers
What is one characteristic of a corporation?
What is one characteristic of a corporation?
What is double taxation in a corporation?
What is double taxation in a corporation?
What is one advantage of a corporation?
What is one advantage of a corporation?
Limited liability of stockholders
Name a disadvantage of a corporation.
Name a disadvantage of a corporation.
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What is the first step in forming a corporation?
What is the first step in forming a corporation?
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What are organization costs in a corporation?
What are organization costs in a corporation?
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What rights do stockholders have?
What rights do stockholders have?
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What is authorized stock?
What is authorized stock?
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What determines the stock market price?
What determines the stock market price?
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What does par value of stock represent?
What does par value of stock represent?
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What is the primary objective in accounting for the issuance of common stock?
What is the primary objective in accounting for the issuance of common stock?
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What is the journal entry when common stock is issued at par value?
What is the journal entry when common stock is issued at par value?
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When issuing common stock with a price different from par value, what additional account is credited?
When issuing common stock with a price different from par value, what additional account is credited?
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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
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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.
