Chapter 14 Flashcards
What is the difference between an S corp and a C corp
S Corp - doesn’t pay tax but stakeholders are
only an issue to 100 stockholders
C Corp: both corp and stakeholders are taxed
unlimited stockholders
What are the advantages of Corporations
Limited Liability: the most you can lose is your investment
Separate Legal entity: separation from stockholders and corporation
Ease of capital formation: if the company needs to raise capital it can issue more shares
unlimited life: don’t have to worry about transfer of ownership and losing shares
Transferability: easy to transfer of shares
Professional management: shareholders don’t have to be involved with organization
What are disadvantages of a corporation
Taxation: get double-taxed
formation: hard to form a c corporation
Regulation: heavily regulated by the government
separation from management: shareholders can’t really do anything about questionable management
What are the characteristics of common stock
- Voting rights
-Residual claim
-preemptive right
- term: does not have a maturity date
- dividends
what does residual claim mean
owners are paid with assets that remain after other claims (liabilities) have been paid off
what does preemptive rights mean
stockholders have the right to aquire proportionate shares so they can keep the same percentage of the company if the issue more stocks
What is the proportional method
FV of common + FV of preferred
this gives you your percentage and you multiply that by your actual lump sum amount
What are the two methods to allocating proceeds when stocks are sold in a lump sum
1.) Proportional method
2.) Incremental method
what is the incremental method?
allocate the cash to the known value FV and then back into other stock
What is the general rule for stock issued in a non-cash transaction
companies should record stock issued at the
-FV of stock issued or if that is not apparent the FV of the non cash consideration received
What are cost incurred of issuing stock
direct costs incurred to sell the stock
-underwriting cost
-printing cost
- taxes
how does the cost of issuing a stock look in a journal entry
offsets
cash
pic
common
pic
cash
What are the characteristics of preferred stock
- dividends
-non-voting
-liquidation: claim on companies asset first
-term: no maturity
What does it mean if a preferred stock is cumulutive
-if dividends fail to be payed to shareholders then they need to be made up in future years before common stocks
What does it mean if a preferred stock is participating
share ratably with the common shareholders
in any profit distributions beyond the prescribed rate.
what does it mean if preferred stock is convertible
it means that preferred can be exchanged to common stock
What does it mean if preferred stock is callable
allows corporations to buy back its stock
what does it mean if common stock is redeemable
stock holders can redeem at any time
What account is treasury stock
contra equity account -debit
what cannot be done with the purchase of treasury stock
treasury stock does not give the
corporation the right to vote, to exercise preemptive rights
as a stockholder, to receive cash dividends, or to receive
assets upon corporate liquidation.
Why do corps buyback their stock
1.) Their stock is undervalued - wanna buy back and sell for more
2.) Dividend commitment - allows shareholders to get more dividends
3.) Dilution issues
4.) maintain control
5.) change performance metrics
How do you account for purchase of treasury stock
Cost method:
Treasury stock
cash
Sale of treasury stock above cost
Cash
PIC
treasury
Sale of treasury above cost
Cash
PIC
(could be retained earnings if you run out of PIC)
Treasury stock
