Ch 13 - Introduction to Corporations Flashcards
What is a corporation
A legal entity that is separate from it’s owners (shareholders). May buy, own and sell property, borrow money all in its own name. It pays income tax as a separate entity.
Private vs public corporation
Public - shares available to the public to purchase
Private - Held by a few shareholders and are not available for the general public to purchase.
Turin Corp incorporated Mar 1.
Mar 5 Issued 120,000 common shares at $8 per share
Apr 2 Issued 3,200 common shares to its lawyers in settlement of their bill for $25,000. Turin’s president agreed shares had a fair value of $8 each.
May 22 Issued 10,000 preferred shares for $90 each. Each share was convertible to 10 common shares
Oct 5 Preferred shareholders converted 2000 of the preferred shares into common. At that point, it was estimated that fair values of common share were 10, and preferred shares were 92. Record.
Mar 5 Cash 960,000
Common Shares 960,000
Apr 2 Legal fees expense 25,000
Common shares 25,000
May 22 Cash 900,000
Preferred shares 900,000
Oct 5 Preferred shares (2000x 90) 180,000
Common shares 180,000
Year end June 30, 2017, Neptune had service revenue of $350,000, operating expenses of $195,000 and interest expense of $14000. Company had 25% income tax rate.
A) determine income tax expense
B) Prepare income statement
350,000 - 195,000 - 14,000 = 141,000 x 25% = $35,250
Service revenue $350,000
operating expenses 195,000
Profit from operations 155,000
Interest expense 14,000
Profit before income tax 141,000
Income tax expense 35,250
Profit $105,750
What are the necessary conditions to pay cash dividends?
Need enough cash, maintain legal capital to continue operations, board of directors makes declaration
Dividends in arrears (owed for preferred) - are they a liability?
Not until it is declared by board of directors. However, amount of dividends in arrears should be disclosed in the notes to the financial statements.
What is the normal balance for retained earnings?
What about if total losses and dividends to date are greater than total profit?
a credit. If total losses and dividends to date are greater than total profit, retained earnings will have a debit balance, called a deficit.
Ilona purchased 100 common shares of Air Canada on the Toronto stock exchange for $50 per share. Air canada had originally issued these shares at $33. This transaction would have what impact on Air canada's Common shares account? A) Increase of $1,700 B) Increase of $3,300 C) Increase of $5000 D) No effect
D) No effect
ABC issued 1000 common shares at $12 per share. In recording the transaction, a credit is made to:
A) Gain on Sale of shares for $12,000
B) Common Shares for $12,000
C) Investment in ABC common Shares for $12,000
D) Cash for $12,000
B) Common shares for 12000
Orcus issued 1000 common shares in exchange for land that will be used in operations. The shares that are actively trading at $9 per share. The land was advertised for sale at $10,500. The land should be recorded at:
A) $4000 B) $5000 C) $9000 D) $10,500
C) 9000.
in 2017 Lucina Corp had $480,000 of revenue and $216,000 of operating expenses. The company has 17% income tax rate. What is the company’s profit for the year?:
A) $44,880 B) 219,120 C) 264,000 D) 435,120
Revenue 480,000 Operating expenses 216,000 Profit from operations 264,000 Income tax expense 44,880 Profit $219,120 B)
Cyberscape ltd began operations on Jan 1, 2016 and issued common shares for $285,000 cash. On dec 31, 2016 the balance in the retained earnings account was a deficit of $57,000. IN 2017 the company had a profit of $123,000 and declared a $30,000 dividend on Dec 17 payable on Jan 8, 2018. What is the ending balance in Retained Earnings on Dec 31, 2017?
A) ($57,000) B) 36,000 C) 66,000 D) 30,000
B) 36,000.
-57,000 + 123,000 - 30,000
E13-3. Santiago Corp, received its articles of incorporation Jan 3, 2017. Its authorized to issue an unlimited amount of common shares and $1 preferred shares. It had the following transactions during the year:
Jan 12 Issued 50,000 common shares for $5/share
Jan 24 Issued 950 common shares in payment of a $4500 legal services
July 11 Issued 1000 preferred shares for $25/ share
Aug 10 Issued 500 preferred shares for $28/share
Oct 1 Issued 10,000 common shares in exchange for land. Lands fair value was estimated to be $55,000. Santiago’s accountant estimated that the fair value of the shares issued might be as high as $6 per share.
Journalize the share transactions
Nov 1 Converted 50 preferred shares into common shares. One preferred share is convertible into 100 common shares. Fair value of common and preferred shares are $8 and 30 respectively.
B) Calculate the average per share for common shares before the PS conversion Nov 1st.
Jan 12 Cash 250,000
common shares 250,000
24 Legal fees expense 4500
Common shares 4500
July 11 Cash 25,000
Preferred shares 25,000
Aug 10 Cash 14,000
Preferred shares 14,000
Oct 1 Land 55,000
Common Shares 55,000
Nov 1 Preferred shares (50x26) 1300
Common shares 1300
1000+500 preferred shares = 1500 shares.
25,000+ 14,000 / 1500 shares = 26$ per share.
B) 50,000 + 950 + 10,000 = 60950 shares
$250,000 + 4500 +55,000 = 309,500 / 60950
= 5.07 per share.
Chicken Co has had the following shares outstanding since inception on Dec 31, 2008:
25,000 shares of $1.50 cumulative preferred shares
120,000 common shares issued at $10 each
Board of directors has declared the following dividends on Sept 30 of each year:
2009 none 2010 $30,000 2011 $65,000 2012 $85,000 2013 $100,000 For each year, journalize the record the declaration of the dividends.
$37,500 accumulates each year for preferred div.
2009 - no entry
2010 Retained earnings 30,000
Dividends payable - preferred shares 30,000
2011 Retained earnings 65,000
Dividends payable - preferred shares 65,000
2012 Retained earnings 85,000
Dividends payable - preferred shares 55,000
Dividends payable - common shares 30,000
2013 Retained earnings 100,000
Dividends payable - preferred shares 37,500
Dividends payable - common shares 62,500
