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Accounting for Corporations

There are three general legal forms that a business can take: the sole proprietorship, the partnership and the corporation. Unlike proprietorships and partnerships, corporations are considered to be a separate legal entity distinct from its owners.

The main advantage of the corporate form is that the owners of a corporation have limited liability. Limited liability means that if the corporation is sued or goes bankrupt, the corporation’s owners cannot lose any more than what they invested. They may lose their investment, but creditors cannot come after the owner’s own assets to settle the corporation’s obligations.  It is also very rare that plaintiff’s are able to sue the owner’s of the corporation for injury resulting from the corporation’s actions.

Another general advantage is that corporations, by issuing shares, have better access to markets to raise capital. This is especially true where the corporation’s shares are publically traded (but this need not be the case – lots of corporations are privately owned).  Corporations that are publically traded are required by law to follow U.S. GAAP as well as the SEC’s rules when preparing their financial statements.

The main disadvantage of the corporate form is that corporations are required to pay taxes as a separate legal entity. This means that the profit of a corporation is taxed when it is earned, and is also taxed when it is distributed to shareholders as dividends. This creates a double taxation. According to the IRS, a corporation cannot deduct dividends from income and shareholders cannot deduct corporate losses.1

Small business corporations or an S-corporation is a corporation that elects to pass its corporate income, losses, deductions and credits through to their shareholders for federal tax returns. It is the exception to the rule that corporations are taxed as a separate legal entity and; as a result, there are a number of limitations on the types of corporations that can register as an S-corporation.2 


1. IRS "S Corporations." Retrived from:
2. IRS. "Corporations." Retrieved from:

Categories within Accounting for Corporations

Issuing Shares

Postings: 42

Like getting a loan, or issuing bonds (debt), issuing shares is a way that corporations can raise cash to finance the operations of their business.

Repurchasing Shares

Postings: 0

Share buybacks are a way to return cash to shareholders, decrease the number of shares outstanding, and improve share-based performance ratios such as earnings per share.

Cash Dividends

Postings: 0

Corporations pay cash dividends to return cash to distribute earnings to shareholders. When a corporation pays dividends in the form of cash (or other assets - but not stock) the shareholders' equity of the firm decreases. Corporations are not allowed to distribute dividends in excess of retained earnings.

Stock Dividends and Stock Splits

Postings: 181

A stock dividend is a dividend paid by the distribution of additional shares to existing shareholders rather than paying cash. A stock split occurs when a corporation divides its existing shares into multiple shares. A stock split is conceptually the same as a stock dividend but is treated differently by U.S. GAAP.

Stock-Based Compensation

Postings: 2

Stock-based compensation such as the direct award of stock or the granting of compensatory stock options is a way for corporations to compensate employees with ownership of the corporation in lieu of salary or bonuses.

Accounting Entries for Stockholders Equity Section

The Primo Corporation began operations two years ago and was authorized to issue 500,000 shares of 6%, $100 par value preferred stock and 2,000,000 shares of $5 par value common stock.The following transactions and events were completed during 2014. (Note: at the beginning of 2014 there are 1,000 shares of preferred stock and 50

Stock Dividend, Stock-Split, Treasury Stock

The CEO of your company has asked you to make a speech at the next board of directors meeting to the directors on stocks and dividends. Explain the following: What are the differences between a stock dividend, a stock-split, and treasury stock? For each event: explain the effects to stockholders explain the effects on t

Preferred dividends, participating, noncumulative, cumulative

AE15-21 (Preferred Dividends) The outstanding capital stock of Pennington Corporation consists of 2,900 shares of $102 par value, 6% preferred, and 5,800 shares of $52 par value common. Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were

Dividend and Non-Dividend Stock Valuation

One primary reason individuals invest in stocks is to receive returns on their investment in the form of dividends. Not all companies opt to offer dividends to their investors, however. In their article The Dividend Discount Model in the Long-Run: A Clinical Study, the authors discuss the importance of three variables that affec

Common and preferred stock, issuances dividends Permabilt Corp.

Permabilt Corp. was incorporated on January 1, 2010, and issued the following stock for cash: 3,600,000 shares of no-par common stock were authorized; 1,050,000 shares were issued on January 1, 2010, at $46 per share. 1,200,000 shares of $100 par value, 10.5% cumulative, preferred stock were authorized, and 420,000 shares we

Dividends in the market

Problem 1: Midnight Hour Inc. has declared a $5.10 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15%. New IRS regulations require that taxes be withheld at the time the dividend is paid. Midnight Hour sells for $83 per share and the stock is about to go ex-dividend. What do you think t

Dividend Payout and Shareholder Wealth

See the attached file. EBIT-EPS and Capital Structure Percy's, Inc. is considering the purchase of a small company which supplies the firm with a major component used to manufacture its main product. The purchase would be financed by the sale of common stock or a bond issue. The

Dividend Hypothesis/Theory

Phil Grange, the CEO of Haveloche Corporation, has been asked to be a guest lecturer at Cokesbury College. One of the finance professors has specifically requested a discussion on Haveloche's dividend policy. In preparation, Phil has reviewed several textbooks that Dr. Roche, the professor, has provided, and has printed out the

Debt versus Equity Financing (Interest versus Dividends)

Aside from taxes, another important difference between debt and equity financing is that debt payments must be made to avoid default, while firms have no similar obligation to pay dividends. How do debt and equity financing affect a firm's tax situation differently? Why do debt payments have to be made but dividends do not have

Stock and Dividend Questions

1. A stock had a price at the beginning of the year of $100 and was selling for $102 at the end of the year. If the total shareholder returns were 5 percent, then the cash dividend per share must have been what? 2. A firm with a 50 percent debt ratio faces a 40 percent tax rate and pays a 10 percent interest rate on its debt.

Dividends and Stockholders Equity

Elizabeth Company reported the following amounts in the stockholders' equity section of its December 31, 2010, balance sheet. Preferred stock, 10%, $100 par (10,000 shares authorized, 2,000 shares issued) $200,000 Common stock, $5 par (100,000 shares authorized, 20,000 shares issued) $100,000 Additional paid-in capita

Calculating Dividends

See attached for the proper table. The shareholders' equity of Kramer Industries includes the data shown below. During 2012, cash dividends of $150 million where declared. Dividends were not declared in 2010 or 2011. $ in millions Common Stock $200 Paid-in capital excess of par, common 800 Preferred stock, 10%, nonpart

Calculating Dividends Per Share

Wings Inc., a software development firm, has stock outstanding as follows: 25,000 shares of cumulative 1%, preferred stock of $40 par, and 50,000 shares of $120 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $7,500; second year, $10,500; third year, $25,000

Boss's angry email sends shares plunging

Boss's angry email sends shares plunging By Philip Delves Broughton in New York 12:00AM BST 06 Apr 2001 A CHIEF executive who sent his staff an email accusing them of being lazy and threatening them with the sack has seen the share price of his company plummet after his message was posted on the internet. In the three days a

Choose the correct answers.

In singer Whitney Houston's will, she leaves her daughter, Bobbi Kristina, $20 million. Bobbi Kristina goes to the Body Guard Bank where her financial advisor, Frank Farmer, recommends that she use a discount rate of 5% when evaluating her investment alternatives. He tells her about an "I Will Always Love You" perpetuity inves

Earnings and Dividends Growth Rates

Calculate earnings and dividends growth rates for the two companies below with the following information: Kennedy Strasburg Earnings per share 2010

investment environment: How many shares of the stock can the Pangs buy?

Robert pang, a 53- year- old software engineer, and his wife, Jean, have $50,000 to invest. they will need the money at retirement 10 years. They are considering 2 investments. The first is a utility company common stock that cost $50 per share and pays dividends of $2 per share per year (a 4% dividend yield). Note that these di

How much of this $150,000 goes to the holders of preferred stock?

A corporation has 100,000 shares of 7 percent cumulative preferred stock and 40,000 shares of common stock outstanding.Par value for each is $10. no dividends were paid last year, but this year a $150,000 dividend is paid. a) how much of this $150,000 goes to the holders of preferred stock? b)Assume the same facts as in Qu

Chill Out Corporation's Next Annual Dividend & 2 Other Multi-Choice Questions

Chill Out Corporation's next annual dividend is expected to be $1.06 per share. Dividends and earnings have been growing at 6% a year and you expect this growth rate to continue indefinitely. If your required rate of return for this stock is 14%, what is the maximum price you should be willing to pay for it? a. $7.57 b.

BA 341 financial management

The preferred stock of Nadine Fashions pays an annual dividend of $2.3 a share and sells for $45 a share. The tax rate is 34 percent. What is the firm's cost of preferred stock? 2.73 percent 5.93 percent 5.11 percent 4.56 percent 6.12 The common stock of Pittsburgh Steel Products has a beta of 1.52 and a sta

A firm issued a preferred stock which matures in 30 years and carries a maturity value of $45. The dividend is $4 per year over the 30 year period. The current market discount rate for this stock is 8%. What is the value of the preferred share?

Preferred stock is a hybrid security that is an equity holding but behaves more like a bond, as far as stock price movements. Preferred stock has no voting rights, and in the event of bankruptcy, preferred shareholder claims follow bondholders and precede common shareholders. Preferred dividends are contractual, in that while

Stock Comparisons

Lab X is a profitable firm that is not paying a dividend on its common stock. Jim, an analyst for Invest Today, believes that Lab X will begin paying a $2.00 per share dividend in two years and that the dividend will increase 5% thereafter. Bob, one of Jim's colleagues at the firm, is less optimistic. Bob thinks that Lab

Earnings and dividend model for value of Allen Corporation

J. Jones Investment Bankers will use a combined earnings and dividend model to determine the value of the Allen Corporation. Estimate earnings per share for the next five years are: 2008 - $3.20 2009 - 3.60 2010 - 4.10 2011 - 4.62 2012 - 5.20 a. If 40% of earnings are paid out in dividends and the discount rat

Hart Enterprises recently paid a dividend, of $1.25. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 10%. A. How far away is the terminal, or horizon, date? B. What is the firm's horizon, or terminal, value? C. What is the firm's intrinsic value today?

Hart Enterprises recently paid a dividend, of $1.25. It expects to have nonconstant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 10%. A. How far away is the terminal, or horizon, date? B. What is the firm's horizon, or terminal, value? C. What is the firm's

Calculate the stock price today given expected dividends

A company expects to grow its dividend by 2% each year, forever. The expected dividend in year 1 is $2.00. Investors require a 6% rate of return on this stock. What is the stock price today? $25.66 $36.23 $50.00 $22.96 $47.02 $19.27