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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: 43

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: 182

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

When a company purchases shares of its own common stock

A company purchases 1,000 shares of its own previously issued $5 per common stock for $12,000. Assuming the shares are held in the treasury, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders' equity? The company's treasure stock is resold for $15,000

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

Total Stock Return with No Dividends Paid

Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers stock during the most recent year? Assume that no dividends were paid and round to the nearest percent.

Annual Dividend and Market Rate of Return

Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return?

Dividends per Shares and Payout Ratio

If we consider payout ratio = 34% and we have NI=$2,776,698 34% = Dividend/2,776,698 Dividends = $944,077 Since total shares = 67,815 The dividend per share will be $14 ($944,077/67,815) Please let me know if I'm correct.

The Common Stock Dividends

My team is planning to invest $500,000 in dividends. If we have a total of 67,815 total shares, the dividend per share will be $7.37. Am I right? Don't you think that $7.37 per share is too much? or Should we invest only 300,000? Please see attachment with the current figure we have for this quarter. Thank you.

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

Issued Shares and Outstanding Shares

The balance sheet caption for common stock is the following: Common stock without par value, 2,000,000 shares authorized, 400,000 shares issued, and 360,000 shares outstanding; $2,600,000 a) Calculate the average price at which the shares were issued; Price= $ b) If a cash dividend of $0.60 per share were declared,

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

Dividend Smoothing and Adjustment Rate

The Sharpe Co. just paid a dividend of $1.80 per share of stock. Its target payout ratio is 38 percent. The company expects to have an earnings per share of $4.35 one year from now. Question 1: If the adjustment rate is .45 as defined in the Lintner model, what is the dividend one year from now? Round your answer to 3 decima

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

Capital Valuation Methods

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.

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

Stock current market value

Fasco Industries just paid a dividend of D0 = $1.45. Analysts expect the company's dividend to grow by 28% this year, by 11% in the second, and at a constant rate of 6% in the third year and thereafter. The required return on this low-risk stock is 11.00%. How do you estimate, and from your calculations, what is the best estimat

Companies Deciding Whether or Not to Pay Dividends

Stockholders do not get to decide on whether dividends are paid or not, but they can pressure the company to pay dividends. For example, Microsoft did not pay dividends at all for many years and then were pressured to do so since they had a lot of cash. What conside

Explanation of Stock Dividends

What about a stock dividend? How are stock dividends accounted for and why is there more than one accounting method for them?

Financial Management Question: Determining current stock price

A company currently pays a dividend of $2per share(D0= $2). It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company 's stock has a beta of1.2, the risk free rate is 7.5%,and the market risk premium is 4%. What is your estimate of

Fashonista Skincare Computing Dividends - Preferred Common

Fashonista Skincare has 10,000 shares of 3%, $20 par value preferred stock and 90,000 shares of $2 par common stock outstanding. During a three-year period, Fashionista declared and paid cash dividends as follows: 2010, $3,000; 2011, $13,000; and 2012, $17,000. 1.) Compute the total dividends to preferred and to common for ea

Value of stock that pays the first dividend 20 years later has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a 9.00 percent return on this stock, how much should you pay today?

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

Fashonista Skincare

Fashonista Skincare has 10,000 shares of 3%, $20 par value preferred stock and 90,000 shares of $2 par common stock outstanding. During a three-year period, Fashionista declared and paid cash dividends as follows: 2010, $3,000; 2011, $13,000; and 2012, $17,000. Requirements 1.Compute the total dividends to preferred and to c