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Warren SMChap11 - CHAPTER 11 CORPORATIONS ORGANIZATION...

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585 CHAPTER 11 CORPORATIONS: ORGANIZATION, STOCK TRANSACTIONS, AND DIVIDENDS EYE OPENERS 1. Each stockholder’s liability for corporation debts is limited to the amount invested in the corporation. A corporation is responsible for its own obligations; therefore, its creditors may not look beyond the assets of the cor- poration for satisfaction of their claims. 2. The large investments needed by large busi- nesses are usually obtainable only through pooling of resources of many people. The corporation also has the advantages over proprietorships and partnerships of transfer- able shares of ownership, and thus the con- tinuity of existence, and limited liability of its owners (stockholders). 3. No. Common stock with a higher par is not necessarily a better investment than com- mon stock with a lower par because par is an amount assigned to the shares. 4. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are declared. If the company that issued the preferred stock has operating losses, it could omit dividends, first, on its common stock and, later, on its preferred stock. 5. Factors influencing the market price of a corporation’s stock include the following: a. Financial condition, earnings record, and dividend record of the corporation. b. Its potential earning power. c. General business and economic condi- tions and prospects. 6. No. Premium on stock is additional paid-in capital. 7. a. Sufficient retained earnings, sufficient cash, and formal action by the board of directors. b. February 16, declaration date; March 18, record date; and April 17, payment date. 8. The company may not have had enough cash on hand to pay a dividend on the com- mon stock, or resources may be needed for plant expansion, replacement of facilities, payment of liabilities, etc. 9. a. No change. b. Total equity is the same. 10. a. Current liability b. Stockholders’ equity 11. a. Unissued stock has never been issued, but treasury stock has been issued as fully paid and has subsequently been reacquired. b. As a deduction from the total of other stockholders’ equity accounts. 12. a. It has no effect on revenue or expense. b. It reduces stockholders’ equity by $450,000. 13. a. It has no effect on revenue. b. It increases stockholders’ equity by $615,000. 14. The primary advantage of the combined income and retained earnings statement is that it emphasizes net income as the con- necting link between the income statement and the retained earnings portion of stock- holders’ equity. 15. The three classifications of restrictions on retained earnings are legal, contractual, and discretionary. Appropriations are normally reported in the notes to the financial state- ments. 16. Such prior period adjustments should be reported as an adjustment to the beginning balance of retained earnings.
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