CHAPTER 14 Corporations: Organization and Share .CHAPTER 14 Corporations: Organization and Share

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Text of CHAPTER 14 Corporations: Organization and Share .CHAPTER 14 Corporations: Organization and Share

  • 14-1

    CHAPTER 14 Corporations: Organization and Share Capital Transactions

    ASSIGNMENT CLASSIFICATION TABLE

    Study Objectives

    Questions

    Brief Exercises

    Exercises

    Problems Set A

    Problems Set B

    1. Identify and discuss the major characteristics of a corporation.

    1, 2, 3, 4, 5 1, 3 1 1 1, 2

    2. Differentiate between contributed capital and retained earnings.

    6, 7 2 2 2

    3. Record the issue of common shares.

    8, 9, 10, 11, 12, 13, 14, 15, 16

    3, 4, 5, 6 2, 3, 4, 5, 6, 7

    2, 3, 4, 5, 8

    2, 3, 4, 5

    4. Differentiate and journalize preferred and common share transactions.

    17, 18 7 5, 6, 7 2, 3, 4, 5

    2, 3, 4, 5

    5. Prepare the shareholders equity section of the balance sheet.

    19 8 7, 8, 9 2, 3, 4, 5, 6, 9

    2, 3, 4, 5, 6, 9

    6. Calculate return on equity and book value per share.

    20, 21 9,10, 11 9, 10 5, 6, 7, 8, 9 4, 5, 6, 7, 8, 9

  • 14-2

    ASSIGNMENT CHARACTERISTICS TABLE

    Problem Number

    Description

    Difficulty Level

    Time Allotted (min.)

    1A Determine forms of business organization.

    Simple 35-45

    2A Answer questions about shareholders equity section.

    Simple 20-30

    3A Journalize and post share transactions. Prepare contributed capital section.

    Moderate 25-35

    4A Journalize and post shareholders equity transactions. Prepare shareholders equity section.

    Moderate 30-40

    5A Journalize and post share transactions, and prepare a shareholders equity section. Calculate the return on equity and book value.

    Moderate 20-30

    6A Prepare shareholders equity section and calculate book value. Moderate 20-30

    7A Show impact of transactions on ratios.

    Moderate 15-25

    8A Calculate book values; compare to amounts paid in.

    Moderate 15-25

    9A Prepare balance sheet; calculate return on equity and book value.

    Moderate

    30-40

    1B Determine forms of business organization.

    Simple 35-45

    2B Answer questions about shareholders equity section.

    Simple 20-30

    3B Journalize and post share transactions. Prepare contributed capital section.

    Moderate 25-35

    4B Journalize and post shareholders equity transactions. Prepare shareholders equity section. Calculate return on equity.

    Moderate 30-40

    5B Journalize and post share transactions, and prepare a shareholders equity section. Calculate the book value and return on equity.

    Moderate 20-30

    6B Prepare shareholders equity section and calculate book value. Moderate 20-30

    7B Show impact of transaction on ratios.

    Moderate 15-25

    8B Calculate return on equity and book value.

    Moderate 15-25

    9B Prepare balance sheet; calculate return on equity and book value.

    Moderate

    30-40

  • 14-3

    BLOOMS TAXONOMY TABLE Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material

    Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Identify and

    discuss the major characteristics of a corporation.

    Q14-4

    Q14-1 Q14-2 Q14-3 Q14-5 BE14-1 BE14-3

    P14-2B E14-1 P14-1A P14-1B

    2. Differentiate between contributed capital and retained earnings.

    Q14-6 Q14-7 BE14-2 P14-2A P14-2B

    3. Record the issue of common shares.

    Q14-9 Q14-10 Q14-11 Q14-15 Q14-16 BE 14-3

    Q14-8 Q14-12 Q14-13 Q14-14 BE14-4 BE14-5 BE14-6 E14-2 E14-3 E14-4 E14-5

    E14-6 P14-2A P14-3A P14-4A P14-5A P14-2B P14-3B P14-4B P14-5B P14-8B

    P14-8A E14-7

    4. Differentiate and journalize preferred and common share transactions.

    Q14-17 Q14-18

    BE 14-7 E14-5 E14-6 P14-2A P14-3A P14-4A

    P14-5A P14-2B P14-3B P14-4B P14-5B

    E14-7

    5. Prepare the shareholders equity section of the balance sheet.

    Q14-19

    BE14-8 E14-8 E14-9 P14-2A P14-3A P14-4A P14-5A P14-6A

    P14-9A P14-2B P14-3B P14-4B P14-5B P16-6B P14-9B

    E14-7

    6. Calculate return on equity and book value per share.

    Q14-20 Q14-21 BE14-10 BE14-11

    BE14-9 E14-9 E14-10 P14-5A P14-6A P14-7A P14-9A

    P14-4B P14-5B P14-6B P14-7B P14-9B

    P14-8A P14-8B

    Broadening Your Perspective

    BYP14-6 BYP14-1 BYP14-2 BYP14-3

    BYP14-4 BYP14-5

    BYP14-7

  • 14-4

    ANSWERS TO QUESTIONS 01. (a) Separate legal existence. A corporation is separate and distinct

    from its owners and acts in its own name rather than in the name of its shareholders. In contrast to a partnership, the acts of the owners (shareholders) do not bind the corporation unless the owners are duly appointed agents of the corporation.

    (b) Limited liability of shareholders. Because of its separate legal

    existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of shareholders is normally limited to their investment in the corporation.

    (c) Transferable ownership rights. Ownership of a corporation is held

    in capital shares. The shares are transferable units. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is (usually) entirely at the discretion of the shareholder.

    02. (a) Taxation is an advantage because corporate tax rates are often

    lower than personal tax rates. It can be a disadvantage because profits distributed to the shareholders are not a tax deductible expense for the corporation. Therefore profits can be subject to double taxationonce at the corporate level and again at the personal rates of the shareholders who receive dividends paid out of these profits (the impact of these taxes is somewhat reduced by the dividend tax credit that shareholders can claim on their personal tax returns).

  • 14-5

    Questions Chapter 14 (Continued) 2. (b) Two other disadvantages of a corporation are government

    regulations and corporate management.

    A corporation is subject to numerous provincial and federal regulations. For example, laws prescribe the requirements for issuing shares, and govern the sale of shares to the general public.

    Professional managers often run corporations with ownership

    being separate from management. Professional managers may act in their own best interests to the detriment of the company and its owners.

    Two advantages of a corporation are limited liability of shareholders and ability to raising capital.

    A corporation is a separate legal entity and therefore the

    shareholders are usually only liable up to their investment in the corporation.

    A corporation has an easier time raising capital because of

    features such as limited liability and the ease of transferring shares.

    3. (a) (1) A charter is a document that creates a corporation. A charter is

    also referred to as the articles of incorporation. (2) Organization costs are costs incurred in the formation of a

    corporation. Organization costs are normally expensed in the year they occur, rather than being capitalized as an intangible asset, because of the difficulty in matching the cost with the future benefits.

    (b) No, this is not correct. Companies in certain industries which are

    under federal jurisdiction must incorporate federally. However, most companies in Canada are incorporated provincially, and are free to operate in other provinces although they may be required to register in other provinces in which they operate.

  • 14-6

    Questions Chapter 14 (Continued) 4. In the absence of restrictive provisions, the basic ownership rights of

    common shareholders are the rights to: 04.

    vote in the election of the board of directors and in corporate actions that require shareholders' approval,

    share in corporate earnings by receiving dividends, maintain the same percentage ownership when additional shares

    of common shares are issued (the pre-emptive right), and share in assets upon liquidation.

    5. The market value of shares depends on a number of factors, including the company's anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the stock market.

    6. The two principal components of shareholders' equity for a

    corporation are contributed capital (the investment of cash and other assets in the corporation by shareholders in exchange for share capital) and retained earnings (net income minus dividends).

    05. 7. Each of the three basic financial statements for a corporation differs

    from those for a proprietorship. The income statement for a corporation will have income tax expense. For a corporation, a statement of retained earnings is prepared to show the changes in retained earnings during the period. In the balance sheet, the owner's equity section is called the shareholders' equity section, and consists of share capital (contributed capital if the shares have a stated value) and retained earnings.

    8. The maximum number of shares that a corporation is legally allowed to

    issue is the number authorized. Letterman Corporation is authorized to sell 100,000 common shares. Of these shares, 53,000 common shares (60,000 issued 7,000 reacquired) have been issued.

    In Canada, shares which are reacquired are usually cancelled and restored to the status of authorized but unissued shares.

  • 14-7

    Questions Chapter 14 (Continued) 9. Stated value doe

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