SMCH12 - Solutions Manual, Chapter 12 323 12 STOCKHOLDERS'...

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Unformatted text preview: Solutions Manual, Chapter 12 323 12 STOCKHOLDERS' EQUITY ANSWERS TO QUESTIONS 1. The advantages of the corporate form of organization include: a. Easy transfer of ownershipsmall, readily transferable units of ownership called shares exist that permit diversification of small portfolios and allow stockholders to sell their shares quickly. b. Limited liabilitystockholders usually do not face the prospect of loss of more than their investment in the shares. c. Continuous existence of the entitycorporate life is not disrupted by the death, incapacity, or withdrawal of a stockholder. d. Easy capital generationbecause many people can take part in the ownership of the corporation, it is easy for a corporation to raise capital. e. Professional managementcorporations often accumulate sufficiently large amounts of capital to warrant employment of a highly skilled professional management team, with a resulting enhancement of earnings to stockholders. f. Separation of owners and entitybecause stockholders are not agents of the corporation, they usually do not have the power to bind the corporation to contracts. 2. The corporation itself is subject to federal income taxation on its income. When corporate income after taxes is distributed as dividends, the dividends are taxable as income to the stockholders. Thus, the alleged double taxation exists. The other disadvantages of the corporate form of organization include: a. Greater government regulation. b. The difficulty encountered in attempting to remove an entrenched inefficient management. c. For small corporations, the limited liability feature may make it difficult to secure creditor capital. 3. Organization Expense, although a commonly used title, is a poor one because the account is an asset, not an expense. It could be argued that the costs recorded in the account give as much benefit to the last year of the life of the corporation as to any other year, and hence the asset does not decrease in value with the passage of time. Yet, the account must be amortized over a period not to exceed 40 years. 4. The basic rights are: (a) to dispose of shares, (b) to buy additional shares in proportion to the percentage of shares already owned (preemptive right), (c) to share in dividends when declared, (d) to share in assets in liquidation, and (e) to indirectly participate in management by voting at stockholders' meetings. 5. a. The stockholders' ledger contains an account for each stockholder showing the number of shares owned. This ledger enables the corporation to know exactly who owns the shares outstanding at any given moment. b. The minutes book is the official written record of the actions taken at official meetings of the board of directors and at stockholders' meetings and is the authority for the actions of the corporation's officers....
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This note was uploaded on 02/08/2011 for the course ACCT 2101 taught by Professor Turner during the Spring '08 term at Georgia Institute of Technology.

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SMCH12 - Solutions Manual, Chapter 12 323 12 STOCKHOLDERS'...

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