Which of the following is the primary element that distinguishes accounting for

Question

Which of the following is the primary element that distinguishes accounting for corporations

from accounting for other legal forms of business entity (such as partnerships)?

A. The entity theory relates primarily to the other forms of business entity.

B. The corporation draws a sharper distinction in accounting for sources of capital.

C. In a corporation, retained earnings may be reduced only by the declaration of dividends.

D. Generally accepted accounting principles apply to corporations but have relatively little applicability to other forms of business entity.

Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its fair value should be

A. Ignored.

B. Reported as a separately disclosed reduction of retained earnings.

C. Reported as an item of other comprehensive loss.

D. Reported as a loss in the income statement.

Explanation / Answer

1) Solution: The Corporation draws a sharper distinction in accounting for sources of capital.

Explanation: The Corporation makes a strong distinction in accounting for sources of capital compared to other legal forms of business entity

2) Solution: Reported as a reduction in income from continuing operations

Explanation: When the market value and carrying value of an asset distributed as a property dividend are not the same, the resulting loss or gain on disposal is recognized in income from continuing operations, just as the loss or gain from disposal is recognized for any other cause. If the asset had been sold first, and the cash proceeds distributed in lieu of the property dividend, the same gain or loss would have caused.

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