PAIL ASSIGNMENT- Chapter 11 Explain the following characteristics of a corporati
ID: 2529870 • Letter: P
Question
PAIL ASSIGNMENT- Chapter 11 Explain the following characteristics of a corporation a. Separate legal existence. b. Limited liability of stockholders. c. Transferable ownership rights. 1. 2. A corporation has been defined as an entity separate and distinct from its owners. in what ways is a corporation a separate legal entity? 3. What are the two principal components of stockholders' equity? 4. (a) Wha t are the principal differences between common stock and preferred stock? (b) Preferred stock may be cumulative. Discuss this feature. (c) How are dividends in arrears presented in the financial statements? 5. What three conditions must be met before a cash dividend is paid? (a) What is the purpose of a retained earnings restriction? (b) Identify the possible causes of retained earnings restrictions 6. What criteria must be met before a contingency must be recorded as a liability? How should the contingency be disclosed if the criteria are not met? 7. 8. Explain the straight-line method of amortizing discount and premium on bonds payable.Explanation / Answer
1.
a.Separate Legal Existence:
Under Incorporation law, a company becomes a separate legal entity as compared to its members. The company is distinct and different from its members in law. It has its own seal and its own name, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, and borrowing money, employing people, having a bank account, entering into contracts and suing and being sued separately.
b.Limited Liability of Members:
The liability of the members of the company is limited to contribution to the assets of the company upto the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him. If the assets of the firm are not sufficient to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in the case of a company once the members have paid all their dues towards the shares held by them in the company.
c,Transferability of Ownership Rights:
Shares in a company are freely transferable, subject to certain conditions, such that no share-holder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.
2.
The company is distinct and different from its members in law. It has its own seal and its own name, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, and borrowing money, employing people, having a bank account, entering into contracts and suing and being sued separately.
3.
a. Share Capital:
The number of outstanding shares a company owns is an integral part of shareholders' equity. It is the amount of company stock that has been sold to investors and not repurchased by the company. This figure includes the par value of common stock, as well as the par value of any preferred shares the company has sold.
b. Retained Earnings:
When a company retains income instead of paying it out as a dividend to stockholders, a positive balance in the company’s retained earnings account is created. This figure is also included in shareholders' equity and is typically the largest line item in this calculation
4.
a.
Both represent a piece of ownership in a company, and both are tools investors can use to try to profit from the future successes of the business. The main difference between the two types of stock is that holders of common stock typically have voting privileges, whereas holders of preferred stock may not. Most common stock gives the owner one vote per number of shares owned, although that is not always the case. Some preferred stock grants one vote per share, while others provide more, fewer or no voting privileges at all. However, preferred stockholders receive a fixed dividend from the company, while common shareholders may or may not receive one, depending on the decisions of the board of directors.
Preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company's assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out.
b.
Cumulative preferred stock is a type of preferred stock with a provision that stipulates that if any dividend payments have been missed in the past, the dividends owed must be paid out to cumulative preferred shareholders first. This is before other classes of preferred stock shareholders and common shareholders can receive dividend payments.
c.
Arrears of Dividend:
Disclose separately in financial statements as contingent liability and once Board authorises for Arrears payment Present in Short term liabilty.
5.
i) Dividend shall be declared only after Providing Depreciation
ii) Dividend shall be declared after transferring certain percentage of profits to Reserve
iii) Dividend shall be paid only in cash out of Current year Profits of the company after setting of Previous year losses
6.
Restricted retained earnings refers to that amount of a company's retained earnings that are not available for distribution to shareholders as dividends. The primary reason why retained earnings are restricted is that a company is in arrears in its payment of dividends that were due in the past; if so, the amount of the restriction will match the cumulative amount of unpaid dividends. The restriction will then decline as the dividends are paid off.
7. Contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
On Removal of Contingency entity has to provide Liability in Books of Accounts
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