Accounting for Corporations
QUESTIONS 1. Organization expenses (costs) are incurred in creating a corporation. Examples include: legal fees, promoter fees, accountant fees, costs of printing stock certificates, and fees paid to obtain a state charter.
2. Organization expenses (costs) are reported as expenses when incurred—as part of operating expenses—because the amount and timing of their future benefit is difficult to determine. (Instructor note: Prior to SOP 98-5, organization costs were classified as part of intangible assets and then allocated to amortization expense.)
3. The board of directors of a corporation is responsible for directing the corporation's affairs. The directors are elected by the corporation’s stockholders.
4. The preemptive right of common stockholders is the right to maintain their relative ownership interests in the corporation by having the first opportunity to purchase their proportionate share of any additional common shares issued by the corporation.
5. The general rights of common stockholders include: (1) the right to vote in stockholders’ meetings, (2) the right to sell or otherwise dispose of stock, (3) the preemptive right, (4) the right to share proportionately in dividends, and (5) the right to share proportionately in assets remaining after the creditors are paid when, and if, the corporation is liquidated. In addition, stockholders have the general right to receive timely and useful financial reports that describe the corporation’s financial position and the results of its activities.
6. Authorized shares represent the maximum number of shares that a corporation’s charter allows it to sell. Outstanding shares are the number of issued shares that are held by stockholders. The number of authorized shares usually exceeds the number of issued shares, often by a large amount.
7. Convertible preferred stock is potentially attractive because it offers the safety of a regular return as well as the opportunity to share in the increased value of the issuer’s common stock through conversion (or potential conversion).
8. The market value per share of stock is the price at which a share of stock is bought or sold. Many factors—including expected future earnings, dividends, growth, and other company and economic factors—affect market value. Par value per share is an arbitrary value assigned by the corporation in its charter.
9. The par value is an arbitrary value placed on a share of stock when it is authorized. The call price is an amount that a corporation must pay if it exercises the option to buy back and retire a share of callable preferred stock. 10. The three important dates governing dividends are: a. date of declarationthe date the directors vote to pay a dividend. b. date of recorda future date specified by the directors to identify the particular shareholders that are to receive the dividend. c. date of paymentthe date when shareholders receive the dividend payment.
11. Cash dividends debited against paid-in capital accounts are called liquidating dividends because they represent a return of amounts originally invested in the corporation by the stockholders. (They are a return of, not a return on, capital contributions.)
12. Declaring a stock dividend has no effect on assets, liabilities, or total equity. Also, the subsequent distribution of the stock dividend has no effect on these items. Instead, the stock dividend simply increases the number of shares outstanding and results in a transfer of equity from retained earnings to paid-in capital.
13. A stock dividend results in a distribution of additional shares to stockholders and the capitalization of retained earnings. A stock split calls in the old shares and replaces them with a different number of new shares with a new par value. Also, no entry is made to any of the equity accounts with a stock split. In spite of these technical differences, there is no practical