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Chapter 13
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 incurredas part of operating expenses. (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 corporations 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 corporations financial position and the results of its activities.
6. 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 issuers common stock through conversion (or potential conversion).
7. 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.
8. The three important dates governing dividends are:
a) date of declaration.the date the directors vote to pay a dividend.
b) date of record.a future date specified by the directors to identify the particular shareholders that are to receive the dividend.
c) date of payment.the date when shareholders receive the dividend payment.
9.
Cash dividends debited against contributed 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.)
10. 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 contributed capital.
11. A stock dividend results in a d