Buckwold12e_ch12_Review

Buckwold12e_ch12_Review - CHAPTER 12 ORGANIZATION CAPITAL...

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CHAPTER 12 ORGANIZATION, CAPITAL STRUCTURES, AND INCOME DISTRIBUTIONS OF CORPORATIONS Review Questions 1. “To function, a corporation must have some capital contributed by its shareholders. When capitalizing a corporation, the shareholder must provide only share capital.” Is this statement true? Explain. 2. Why is it that a corporate debt owed to a shareholder may be considered as part of the shareholder’s equity of the corporation? How is a shareholder’s loan treated for tax purposes? 3. “When a corporation is partly capitalized with shareholder debt, the amount of corporate income that may be subject to double taxation is reduced.” Explain. Does it matter whether the shareholder debt pays interest or not? 4. If a corporation that is in financial difficulty has been capitalized with shareholder debt and a small amount of share capital as opposed to the reverse, the shareholder may be at less financial risk and the corporation may have a better chance of surviving. Why is this so? 5. A corporation owned solely by shareholder A has a value of $100,000. Individual B intends to acquire a 50% equity interest in the corporation. The cost to that individual of acquiring 50% of the corporation’s shares may be either $100,000 or $50,000. Explain. 6. What is a buy-back of corporate shares? 7. Describe the tax treatment to the shareholder when a corporation buys back its own shares. Is the tax treatment to the shareholder different if that shareholder sells the shares to another party, rather than back to the corporation that issued them? 8. “If a corporation no longer requires the initial common share capital provided by the shareholders, all or a portion of it can be returned to the shareholders without any tax consequences to the shareholders.” Is this statement true? Explain. 9. Would your answer to question 8 be different if the share capital consisted of nonparticipating preferred shares or if the initial capital had been provided by the shareholders as a shareholder loan?
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10. Identify and briefly explain two alternative tax treatments that can apply when assets are transferred to a corporation by a shareholder or a proposed shareholder.
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11. When a shareholder sells property to his or her corporation at fair market value for tax purposes, what impact may the sale have on the shareholder and on the corporation? 12. If a shareholder sells property to a corporation at fair market value for legal purposes but elects an alternative price for tax purposes, what are the tax implications to the shareholder and to the corporation acquiring the asset? Why is this election option referred to as a “roll-over”? 13. When a shareholder sells property to a corporation, that property has a value greater than its cost amount, and the shareholder chooses to use the elective option for tax purposes, what is the maximum amount of non- share consideration that the shareholder can receive from the corporation as payment? 14.
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This note was uploaded on 07/03/2011 for the course BUS 3120 taught by Professor Weedon during the Spring '10 term at University of Winnipeg.

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Buckwold12e_ch12_Review - CHAPTER 12 ORGANIZATION CAPITAL...

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