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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 


References:

1. IRS "S Corporations." Retrived from: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/S-Corporations
2. IRS. "Corporations." Retrieved from: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Corporations

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

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Stock Dividend, Stock-Split, Treasury Stock

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Annual Dividend and Market Rate of Return

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Dividends per Shares and Payout Ratio

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The Common Stock Dividends

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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

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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

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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

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Companies Deciding Whether or Not to Pay Dividends

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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

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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

Boss's angry email sends shares plunging

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Bonds and shares for opportunities

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Earnings Per Common Shares of Stock

At December 31, 2011 and 2010, Miley Corp. had 180,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2011 or 2010. Net income for 2011 was $400,000. For 2011, earnings per common share amounted to: a)

This post addresses the Swedisn investor case below.

A Swedish investor purchased 100 shares of Microsoft on January 1, at $41 per share. The Swedish kroner to the dollar exchange rate at the time of purchase was $:Kr = 9.4173 - 9.4188. One year later, the investor received a dividend of $2 per share, and the investor then sold the shares at a price of $51 per share. The exchange