Chapter 13

Question 1

Corporation

Answer 1

is a legal entity that is separate from its owners, who are known as shareholders.

–> Classified: Purpose, Ownership

Question 2

Public Corporation

Answer 2

corporation whose shares are available for purchase by the general public in an organized securities market

–>it may have thousands of shareholders

Question 3

Private Corporations (Closely Held)

Answer 3

is a corporation whose shares are held by a few shareholders and are not available for the general public to purchase.

Question 4

Separate Legal Existence

Answer 4

an entity that is separate from its owners

–>the corporation acts under its own name rather than in the name of its shareholders.

–>The acts of shareholders (owners in a corporation) do not bind a corporation unless these individuals are also official agents of the corporation.

Question 5

Limited Liability of Shareholders

Answer 5

Since a corporation is a separate legal entity, creditors have access to a corporation’s assets only to satisfy any unpaid claims

–>The liability of each shareholder is limited to the amount that he or she invested in the shares of the corporation.

–> This means that shareholders cannot be made to pay for the company’s liabilities out of their personal assets

Question 6

Transferable Ownership Rights

Answer 6

Ownership of a corporation is held in shares of capital

–>These are transferable units.

–>Shareholders may dispose of part or all of their interest in a corporation simply by selling their shares

Question 7

Public Corporation (Transferable Ownership Rights)

Answer 7

the transfer of shares is entirely decided by the shareholder.

–>it does not require the approval of either the corporation or other shareholders.

Question 8

Private Corporations

Answer 8

there may be a shareholders’ agreement that limits how, and to whom, a shareholder can sell his or her shares.

Question 9

Transferable Ownership Rights Effects

Answer 9

has no effect on the corporation’s operating activities and it doesn’t affect the corporation’s assets, liabilities, and total equity.

–>The transfer of these ownership rights is a transaction between individual shareholders.

–> The company is only involved in the original sale of the share capital to investors

–> therefore,whenever a shareholder sells his or her shares to another investor, the company does not record a journal entry.

Question 10

Ability To Acquire Capital

Answer 10

Corporations may issue shares in order to obtain capital (cash) for operations or new investments.

–>Buying shares in a corporation is often attractive to an investor because a shareholder has limited liability and, in a public company, shares are easily transferable

–>Also, because only small amounts of money need to be invested, many individuals can become shareholders

Question 11

Continuous Life

Answer 11

Corporations have an unlimited life.

–>Because a corporation is a separate legal entity, its continuance as a going concern is not affected by the withdrawal, death, or incapacity of a shareholder, employee, or officer.

Question 12

Government Regulations

Answer 12

Canadian companies may be incorporated federally, under the terms of the Canada Business Corporations Act, or provincially, under the terms of a provincial business corporations act.

–>Federal and provincial laws specify the requirements for issuing shares, distributing income to shareholders, and reacquiring shares.

–> Similarly, provincial securities commissions’ regulations control the sale of share capital to the general public.

Question 13

Income Tax

Answer 13

Corporations must pay federal and provincial income tax as separate legal entities
–>Income tax rates vary based on the type of income and by province

–>Shareholders must pay income tax personally on any dividends (pro rata distribution of profit) they receive from the corporation

Question 14

Forming a corporation

Answer 14

process of creating a corporation requires that the organizers submit articles of incorporation to the federal or provincial government for approval.

–> After receiving its articles of incorporation, the corporation sets its bylaws.

Question 15

Bylaws

Answer 15

are the internal rules and procedures for operations.

–> Corporations that operate inter provincially must also get a license from each province they do business in.

–>The license ensures that the corporation’s operating activities respect the laws of the province.

Question 16

Organization Costs

Answer 16

costs of forming a corporation

–>These costs include legal fees, accounting fees, and registration costs.

–> Under both ASPE and IFRS,these costs are recorded as expenses in the period when they are incurred.

Question 17

Ownership Rights of Shareholders

Answer 17

Shareholders purchase ownership rights in the form of shares.

–>Depending on the company’s articles of incorporation, it may be authorized to issue different classes of shares, such as Class A, Class B, and so on.

–> The rights and privileges for each class of shares are stated in the articles of incorporation.

–>the different classes are often identified by the generic terms “common shares” and “preferred shares.”

–> When a corporation has only one class of shares, this class has the rights and privileges ofcommon shares