Chapter 20 ("Corporations: Formation and Capital Stock Transactions")

Question 1

authorized capital stock

Answer 1

The authorized capital stock is the number of shares authorized for issue by the corporate charter. Usually the authorized stock is more than the number of shares the corporation plans to issue in the foreseeable future. This gives the corporation flexibility to issue stock in the future without having to amend the corporate charter.

Question 2

corporate charter

Answer 2

A document issued by a state government that establishes a corporation

Question 3

5 ADVANTAGES OF THE CORPORATE FORM

Answer 3

LL RA CE TOR ERC

• Limited Liability. Sole proprietors and general partners have unlimited liability; they are personally liable for all debts of the business. Shareholders have no personal liability for the corporation’s debts. The corporation’s creditors must look to the assets of the business to satisfy their claims, not to the owners’ personal property, even in the event of liquidation. It is not unusual, however, for major shareholders of small corporations to give personal guarantees to repay its loans.
• Restricted Agency. A shareholder has no right to act on behalf of the business. Instead, the board of directors controls the corporation, and the corporate officers are in direct charge of operations. For example, a person who owns 10,000 shares of Microsoft Corporation has no greater power to act on behalf of Microsoft than a person who has no ownership interest at all.
• Continuous Existence. The death, disability, or withdrawal of a shareholder has no effect on the life of a corporation.
• Transferability of Ownership Rights. Generally, shareholders can sell their stock without consulting or obtaining the consent of the other owners. Shareholders are free to shift their investments at any time, provided they can find buyers for their stock. Organized stock markets, such as the New York Stock Exchange, make it easy to sell or buy interests in corporations whose stocks are traded.

Small companies often sell shares of stock with a contract that gives the corporation or the existing shareholders “the right of first refusal” to repurchase the shares when the shareholder wishes to sell them.

-Ease of Raising Capital. A corporation can have an unlimited number of shareholders. Some corporations have more than a million shareholders, making available a vast pool of capital.

Question 4

2 DISADVANTAGES OF THE CORPORATE FORM

Answer 4

-Corporate Income Tax. Corporate profits are subject to federal income tax. Profits distributed to shareholders in the form of dividends are taxed a second time as part of the personal income of the stockholder. The taxation of profits at the corporate level and at the shareholder level is known as double taxation.

State and local governments can also levy income taxes on corporations. In addition, most states require corporations to pay an annual franchise tax for the privilege of carrying on business in the state. In some states, especially those that have no corporate income tax, the franchise tax can be quite burdensome.

-Governmental Regulation. Corporations are subject to laws and regulations imposed by the state. In general, the state regulatory bodies exercise closer supervision and control over corporations than they do over sole proprietorships or partnerships. State laws may prohibit corporations from entering into particular types of transactions or from owning specific types of property. Special reports are frequently required of corporations.

Question 5

ENTITIES HAVING ATTRIBUTES OF BOTH PARTNERSHIPS AND CORPORATIONS

Answer 5

Subchapter S corporations - An entity formed as a corporation that meets the requirements of Subchapter S of the Internal Revenue Code to be treated essentially as a partnership, so that the corporation pays no income tax.

• Limited liability partnership (LLP) A partnership that provides limited liability for all partners.
• Limited liability companies (LLCs) Provides limited liability to the owners, who can elect to have the profits taxed at the LLC level or on their individual tax returns.

Question 6

Three terms commonly used to describe stock values.

Answer 6

• Par Value. Par value is an amount assigned by the corporate charter to each share of stock for accounting purposes. It is usually $100 or less; it can be $25, $5, or even less than $1 per share. Stock can be issued for more than par value. State laws prohibit the issuance of par-value stock for less than the par value.
• Stated Value. State laws permit stock to be issued without par value. This type of stock is called no-par-value stock. The value that can be assigned to no-par-value stock by a board of directors for accounting purposes is called the stated value.

Market Value. Market value is the price per share at which stock is bought and sold. After the corporation issues stock, it can be resold for any price that can be agreed on between the shareholder and purchaser. Usually a stock’s market value has little relation to its par or stated value.

Question 7

CLASSES OF CAPITAL STOCK

Answer 7

common stock - The general class of stock issued when no other class of stock is authorized; each share carries the same rights and privileges as every other share. Even if preferred stock is issued, common stock will also be issued.

 Preferred stock - A class of stock that has special claims on the corporate profits or, in case of liquidation, on corporate assets. 
会社が倒産した場合、common stockholdersよりpreferred stockholderの方が優先して資金が分け与えられる。

Convertible preferred stock - Preferred stock that conveys the right to convert that stock to common stock after a specified date or during a period of time

Callable preferred stock - Stock that gives the issuing corporation the right to repurchase the preferred shares from the stockholders at a specific price

Question 8

Special dividend rights can improve the market demand for preferred shares of stock:

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Answer 8

Cumulative preferred stock - Stock that conveys to its owners the right to receive the preference dividend for the current year and any prior years in which the preference dividend was not paid before common stockholders receive any dividends

Noncumulative preferred stock - Stock that conveys to its owners the stated preference dividend for the current year but no rights to dividends for years in which none were declared

Nonparticipating preferred stock - Stock that conveys to its owners the right to only the preference dividend amount specified on the stock certificate

Participating preferred stock - Stock that conveys the right not only to the preference dividend amount but also to a share of other dividends paid

Question 9

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-

Answer 9

• the number of shares authorized and issued
• the par value
• any speciaql privileges carried by the stock.

Question 10

Organization costs

Answer 10

The costs associated with establishing a corporation

Question 11

premium

Answer 11

If the corporation has the potential for earning very attractive profits, investors are willing to pay more than par value to become stockholders. Likewise, if the preferred stock dividend is more attractive than other investments with similar risk, investors are willing to pay more than par value. The amount received by a corporation that is in excess of the par value is called a premium.

A premium on preferred stock is credited to an account called Paid-in Capital in Excess of Par Value—Preferred Stock.

Question 12

subscription book 
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Answer 12

• is a listing of the stock subscriptions received,
• shows the names and addresses of the subscribers,
• shows the number of shares subscribed,
• contains the amounts and times of payment.
• A subscription book can contain the actual stock subscription contracts.

Question 13

transfer agent

registrar

Answer 13

A person or institution that handles all stock transfers and transfer records for a corporation.

A person or institution in charge of the issuance and transfer of a corporation’s stock

Question 14

Which of the following statements is correct?

-The owners of preferred stock are the only stockholders who have the right to vote.

-All stockholders are guaranteed the right to receive
annual dividends.

• The issuing corporation may retain the right to repurchase shares of preferred stock from the stockholders at a specific price.
• In a liquidation, common shareholders are paid before preferred shareholders.

Answer 14

-The issuing corporation may retain the right to repurchase shares of preferred stock from the stockholders at a specific price.

Question 15

A corporation received a subscription for 200 shares of 10 percent, $100 par-value preferred stock at $103 a share. The entry to record this transaction consists of a debit to Subscriptions Receivable—Preferred for $20,600 and a credit to:

• Preferred Stock for $20,000 and a credit to Retained Earnings for $600.
• Preferred Stock Subscribed for $20,000 and a credit to Gain on Sale of Preferred Stock for $600.
• Preferred Stock Subscribed for $20,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $600.
• Preferred Stock Subscribed for $20,600.

Answer 15

-Preferred Stock Subscribed for $20,000 and a credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $600.

Question 16

Organization costs should be:

• treated as an operating expense when incurred.
• debited to an intangible asset account when incurred and systematically charged to expense over a period of up to 40 years.
• debited to an intangible asset account when incurred and carried at the original amount until the business ceases operations.
• debited to an intangible asset account when incurred and carried at the original amount until the business begins to earn a profit.

Answer 16

-debited to an intangible asset account when incurred and systematically charged to expense over a period of up to 40 years.

↑個人的にこの答えはおかしいと思う。。。
教科書には下記が記されている：
the usual practice today is to charge organization costs to expense during the first financial reporting period after the corporation begins activities.

Question 17

Subchapter S corporations:

• have the disadvantage of double taxation.
• require that shareholders report their share of profits on their partnership tax returns.
• have the advantage that shareholders can take part in policy and operating decisions.
• are entities formed as corporations but are treated essentially as a partnership so the corporation pays no income tax.

Answer 17

-are entities formed as corporations but are treated essentially as a partnership so the corporation pays no income tax.

Question 18

One disadvantage of a corporation is:
limited liability.
continuous existence.
double taxation.
transferability of ownership rights.

Answer 18

double taxation

Question 19

Which of the following statements is correct?

• Shareholders have personal liability for a corporation’s debts.
• Shareholders must obtain the consent of other shareholders to sell their shares or buy more shares.
• Limited liability partnership (LLP) partners have liability for their own actions and the actions of those under their control or supervision.
• Shareholders are legally prohibited from acting as an officer or employee of a corporation.

Answer 19

-Limited liability partnership (LLP) partners have liability for their own actions and the actions of those under their control or supervision.

Question 20

The stockholders’ ledger for a class of stock is a subsidiary ledger, and the total shares shown must agree with the number of shares in the capital stock account for that class.
True
False

Answer 20

True

Question 21

Subscriptions Receivable is the control account for the subscribers’ ledger.
True
False

Answer 21

True

Control account: an account used to record the balances on a number of subsidiary accounts and to provide a cross-check on them

Question 22

The entry to record a subscription for 100 shares of common stock at par value would consist of a debit to Subscriptions Receivable—Common and a credit to Common Stock.
True
False

Answer 22

False

CRされるのはCommon stockではなくcommon stock subscribed