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Unformatted text preview: Victor Leung ACCT2111 2010 Chapter 12 1 Chapter 12 Corporate Structure and Stock Transactions and Dividends I. Nature of a Corporation 1. A corporation is an artificial being , invisible, intangible, and existing only in contemplation of the law. 2. The characteristics that distinguish a corporation from proprietorships and partnerships are: Separate legal entity Continuous life Ownership evidenced by shares of stock Ownership is easily transferred through sale of stock The stockholders have limited liability No mutual agency of stockholders partners as for the in the partnership. Separation of ownership and management Owners elect a board of directors Earnings distributed in the form of dividends. Separate taxable entity - and possible double taxation for stockholders. Corporations are taxed on their income and then the stockholders are taxed on their dividend income. Expensive government regulation II. Advantages of a corporation are: (Illustration 12-2, page 537) Separate legal entity Large amounts of capital can be acquired by selling shares to many investors. A corporation has a continuous life . Shares of stock owned by the stockholders are easily transferred . No mutual agency. Stockholders have limited liability and cannot be held responsible for the corporation’s debts. III. Disadvantages of a corporation are: (page 537) Separation of ownership and management Additional government regulations and controls Double taxation Because of the limited liability of the owners, creditors are sometimes reluctant to loan money to a corporation (particularly smaller corporations). IV. Stockholders’ rights (Common Stock): To vote for board of directors and certain important issues in shareholders’ meetings To share in corporate earnings through the receipt of dividends. To maintain the same percentage ownership (pre-emptive right). To share in assets upon liquidation ( residual claim ). (Illustration 12-3, page 539) Victor Leung ACCT2111 2010 Chapter 12 2 V. Stockholders’ Equity Two sources of owners’ equity: Paid-in capital (contributed capital ) -- Money invested by the shareholders. Retained earnings (earned capital) -- Net income less the dividends paid out. VI. Sources of Paid-in Capital 1. Common stock is the basic ownership class of corporate stock. Authorised stock is the amount of stock a corporation is allowed to sell as indicated by its charter . Issued stock is the shares sold or transferred to stockholders. Unissued shares are the difference between the shares of stock authorised and the shares issued. Outstanding stock is stock that has been issued and is still in circulation....
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- Spring '11