Question

The following list of statements about corporations are given below.

Answer 1

Answer:

1. Corporation management is both an advantage and a disadvantage of a corporation compared to a proprietorship or a partnership.

A. True B. False

2. Limited liability of stockholders, government regulations, and additional taxes are the major disadvantages of a corporation.

A. True B. False

3. When a corporation is formed, organization costs are recorded as an asset.

A. True B. False

4. Each share of common stock gives the stockholder the ownership rights to vote at stockholder meetings, share in corporate earnings, keep the same percentage ownership when new shares of stock are issued, and share in assets upon liquidation.

A. True B. False

5. The number of issued shares is always greater than or equal to the number of authorized shares.

A. True B. False

6. A journal entry is required for the authorization of capital stock.

A. True B. False

8. Publicly held corporations usually issue stock directly to investors. The trading of capital stock on a securities exchange involves the transfer of already issued shares from an existing stockholder to another investor.

A. True B. False

9. The market price of common stock is usually the same as its par value.

A. True B. False

10. Retained earnings is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

A. True B. False

Explanation:

1) Corporation management means that experts can be hired as managers.  On the other hand, the managers may not act in the best interest of the owners, even though, they are legally required to do so.

2) Limited liability of stockholders, government regulations, and additional taxes are the major disadvantages of a corporation.  Limited liability of stockholders may be a disadvantage to non-stockholders, but it is an advantage for stockholders, who will not be required to contribute more money to offset liabilities of the corporation in the event of liquidation.  Since corporations are distinct persons in law, they also need to be regulated and taxed as separate persons.  So, this is not a disadvantage.  It is only a consequence of being separate entity, like all individuals.

3) Organization costs include legal payments, state and federal registration, and incorporation fees, promotions, and charges associated with the underwriting of stocks and bonds. Organization costs can be classified as assets on the company's balance sheet.

4) A share in a company's stock accords some rights on the holder as itemized above.

5) The number of issued shares may be equal to or less than the authorized shares.  Some companies do not issue all the shares that they are authorized to issue at the same time.

6) Authorization of capital stock does not require a journal entry.  A memorandum record of the authorization is instead maintained to show the number of authorized capital shares and the par value.

7) There is no question 7.

8) Initial public offerings are made directly to investors.  The stock exchange market caters for the exchange of shares among investors.  The company is not involved and does not take any financial record, except the register of shareholders.

9) The market price of shares may be more or less than the par value.  The market price is determined by investors, who exchange shares at arm's length in the stock exchange market.  The par value is determined by those authorizing the issue of shares.

10) Retained Earnings are the income generated by the corporation which have not been distributed to shareholders in the form of dividends.