1. What is the legal definition of a corporation?

2. How is ownership in a corporation evidenced?

3. Who are the owners of a corporation called?

4. How can corporations be classified based on their purpose?

5. What distinguishes a not-for-profit corporation from a for-profit corporation?

6. What is the difference between a public corporation and a non-public corporation?

7. Why is creating a corporation more costly than organizing a proprietorship or partnership?

8. What are some examples of organization costs?

9. How are organization costs accounted for?

10. What does it mean for a corporation to have a separate legal existence?

11. How does limited liability protect stockholders?

12. What is meant by transferable ownership rights in a corporation?

13. How do corporations benefit from the ability to easily acquire capital?

14. Explain the concept of continuous life for a corporation.

15. How do stockholders manage a corporation indirectly?

16. What role does the board of directors play in a corporation?

17. What government regulations must corporations adhere to?

18. Why are corporations subject to additional taxes compared to other business entities?

19. What information is typically included in the articles of incorporation?

20. What are the components of stockholders' equity on a corporation's balance sheet?

21. How is the stockholders' investment divided and evidenced?

22. What is capital stock?

23. What must a corporation do if it wants to issue more shares than it is authorized to sell?

24. Why does the authorization of common stock not result in a formal accounting entry?
25. Where is the number of authorized shares disclosed?

26. What factors must a corporation consider when deciding the number of shares to authorize for sale?

27. What are the two methods a corporation can use to issue its stock?

28. What factors influence the price of a new issue of stock?

29. What is par value stock, and how is its par value determined?

30. What is no-par value stock, and how is its legal capital determined?

31. What are the major basic rights that accompany ownership of a share of stock?

32. How does common stock differ from preferred stock?

33. Why might a corporation choose to issue preferred stock?

34. How do shareholders manage their organization indirectly?

35. What authority does the board of directors have in relation to distributing earnings?

36. Can a corporation guarantee dividends to its stockholders? Why or why not?

Answer

1. What is the legal definition of a corporation?**

- A corporation is a separate legal entity chartered under law. It is recognized as a 'new person' with
similar rights and obligations that a real person would have.

2. How is ownership in a corporation evidenced?**

- Ownership in a corporation is evidenced by a transferable share of stock.

3. Who are the owners of a corporation called?**

- The owners of a corporation are called stockholders, shareholders, or stock owners.

4. How can corporations be classified based on their purpose?**

- Corporations can be classified as not-for-profit or for-profit based on their purpose.

5. What distinguishes a not-for-profit corporation from a for-profit corporation?**

- Not-for-profit corporations are organized for recreational, educational, charitable, or other

philanthropic purposes, while for-profit corporations are engaged in business activities.

6. What is the difference between a public corporation and a non-public corporation?**

 - Public corporations have shares of stocks that are widely distributed and traded in public markets
and may have thousands of stockholders. Non-public corporations have shares owned by a small group
of individuals.

7. Why is creating a corporation more costly than organizing a proprietorship or partnership?

- Creating a corporation is more costly due to the expenditures incurred to organize it, such as
attorney’s fees, fees paid to the government, and costs of promoting the enterprise.

8. What are some examples of organization costs?

- Examples include attorney’s fees, fees paid to the government, and costs of promoting the
enterprise.

9. How are organization costs accounted for?**

- Organization costs are charged to an intangible asset account called Organization Costs and are
typically amortized.

10. What does it mean for a corporation to have a separate legal existence?**

- It means the corporation is an entity separate and distinct from its owners, acts under its own name,
and can buy, own, sell property, borrow money, enter into contracts, sue, be sued, and pay its own
taxes.

11. How does limited liability protect stockholders?**

- Limited liability means that creditors have recourse only to corporate assets to satisfy claims and
stockholders' liability is limited to the extent of their investment in the corporation.

12. What is meant by transferable ownership rights in a corporation?**

- It means ownership is evidenced by shares of stock, which are transferable units, and the transfer of
ownership rights among stockholders does not affect the corporation’s operating activities or its
financial position.

13. How do corporations benefit from the ability to easily acquire capital?**

- The limited liability of stockholders and the ease of transferring ownership rights make it easier for
corporations to raise capital.

14. Explain the concept of continuous life for a corporation.**

- The life of a corporation is stated in its charter and may be perpetual or limited to a specific number
of years. If limited, it can be extended through renewal of the charter. The corporation’s existence is not
affected by the withdrawal, death, or incapacity of stockholders.

15. How do stockholders manage a corporation indirectly?**

 - Stockholders manage the corporation indirectly by electing a board of directors, which formulates
policies and selects officers to execute these policies and manage daily operations.

16. What role does the board of directors play in a corporation?**

- The board of directors formulates operating policies, selects officers, oversees the operations of the
corporation, and has the authority to distribute earnings to stockholders.

17. What government regulations must corporations adhere to?**

- Corporations must follow requirements for issuing stock, distributions of earnings, retiring stock, and
disclosing financial affairs to the public through quarterly and annual reports.

18. Why are corporations subject to additional taxes compared to other business entities?**

- Stockholders must pay taxes on cash dividends, resulting in corporate income being taxed twice—
once at the corporate level and again at the individual level.

19. What information is typically included in the articles of incorporation?**

- The name of the corporation, the purpose of the corporation, and the types and number of stock the
corporation is authorized to sell.

20. What are the components of stockholders' equity on a corporation's balance sheet?**

- Contributed capital (stockholders' investment) and retained earnings (earnings retained in the
business).

21. How is the stockholders' investment divided and evidenced?**

- The stockholders' investment is divided into shares (stocks) and evidenced by stock certificates.

22. What is capital stock?

- Capital stock refers to the shares of ownership in a corporation.

23. What must a corporation do if it wants to issue more shares than it is authorized to sell?**

- The corporation must obtain consent from the state to amend its charter before issuing additional
shares.

24. Why does the authorization of common stock not result in a formal accounting entry?**

- Because the event has no immediate effect on corporate assets or stockholders’ equity.

25. Where is the number of authorized shares disclosed?**

- In the stockholders’ equity section of the balance sheet.

26. What factors must a corporation consider when deciding the number of shares to authorize for sale?
**

- Future earnings, expected dividend rate per share, current financial position, state of the economy,
and the securities market.

27. What are the two methods a corporation can use to issue its stock?**

- Issuing stock directly to investors or indirectly through an investment banking firm.

28. What factors influence the price of a new issue of stock?**

- The company’s anticipated future earnings, expected dividend rate per share, current financial
position, state of the economy, and the securities market.

29. What is par value stock, and how is its par value determined?**

- Par value stock is capital stock that has been assigned a value per share in the corporate charter. The
par value is chosen by the corporation and is typically low to minimize state taxes.

30. What is no-par value stock, and how is its legal capital determined?**

- No-par value stock has not been assigned a value per share in the corporate charter. The legal capital
is determined by the entire proceeds received upon issuance of the stock or any stated value assigned
by the board of directors.

31. What are the major basic rights that accompany ownership of a share of stock?**

- The right to vote, the right to share in the distribution of earnings, the preemptive right, and the
right to share in assets upon liquidation.

32. How does common stock differ from preferred stock?**

- Common stock generally has equal rights for each share, while preferred stock gives certain
preferences over common stockholders, especially in receiving dividends.

33. Why might a corporation choose to issue preferred stock?**

- To attract investors by offering them certain preferences over common stockholders.

34. How do shareholders manage their organization indirectly?**

- By electing the board of directors, which in turn elects the officers of the corporation and oversees
its operations.

35. What authority does the board of directors have in relation to distributing earnings?**
 - The board of directors has the sole authority to distribute earnings to the stockholders through
dividends.

36. Can a corporation guarantee dividends to its stockholders? Why or why not?**

- No, a corporation cannot guarantee dividends because its operations might not always be profitable,
and the directors have discretion over how much of the earnings to retain for future use or expansion.

Active recall questions

1. **What is no-par value stock?**

- No-par value stock is capital stock that has not been assigned a value per share in the corporate
charter.

2. **Can the board of directors assign a value to no-par stock?**

- Yes, the board of directors can assign a stated value to no-par shares, which then becomes the legal
capital per share.

3. **Does the stated value of no-par stock indicate its market value?**

- No, the stated value, like par value, does not indicate or correspond to the market value of the stock.

4. **What happens to the proceeds received from the issuance of no-par stock without a stated value?
**

- The entire proceeds are considered legal capital.

5. **What are the major basic rights that accompany ownership of a share of stock?**

- The right to vote in matters concerning the corporation, the right to share in distribution of earnings,
the preemptive right, and the right to share in assets upon liquidation.

6. **What type of stock generally has equal rights if a corporation issues only one type of stock?**

- Common stock.

7. **What is the role of shareholders in managing their organization?**

- Shareholders elect the board of directors, who in turn elect the officers of the corporation and
oversee its operations.

8. **Who has the sole authority to declare dividends in a corporation?**

- The board of directors.

9. **What is par value in relation to common stock?**

- Par value is an arbitrary amount assigned to each share of stock, constituting the legal value of the
share.

10. **What is the term used when stock is issued for a price above its par value?**

- Premium.

11. **What is the term used when stock is issued for a price below its par value?**

- Discount.

12. **In Example 2, what is the amount credited to the Paid-in Capital in Excess of Par Value account?**

- 70,000 Br.

13. **What happens to the entire proceeds when non-par stock without stated value is issued?**

- The full amount received is credited to the Common Stock account.

14. **How is stock recorded when issued in exchange for non-cash assets or services?**

- Stock is recorded at the fair market value of the assets or services, unless the fair market value of the
stock is more easily determined.

15. **What preference do preferred stockholders have over common stockholders?**

- Preferred stockholders have a priority in relation to dividends and assets in the event of liquidation.

16. **What is the difference between cumulative and non-cumulative preferred stock?**

- Cumulative preferred stock requires that any unpaid dividends be carried over to future periods,
while non-cumulative preferred stock does not.

17. **In Example 8, what is the total amount of dividends that must be paid to preferred stockholders if
dividends are in arrears for one year?**

- 160,000 Br.

18. **Are dividends in arrears considered a liability?**

- No, dividends in arrears are not a liability because no obligation exists until the board of directors
declares a dividend.

19. **What are the three important dates in relation to dividends?**

- Declaration date, date of record, and date of payment.

20. **What effect does a stock dividend have on a corporation's assets, liabilities, or total stockholder's
equity?**

- A stock dividend does not change assets, liabilities, or total stockholder's equity; it only affects
certain account balances within stockholders' equity.

Multiple Questions

1. **What is no-par value stock?**

a) Stock that has no assigned market value.

b) Stock that has not been assigned a value per share in the corporate charter.

c) Stock that can only be issued by the board of directors.

d) Stock that must be sold at a discount.

2. **Who has the authority to assign a stated value to no-par shares?**

a) Shareholders

b) Corporate employees

c) Board of directors

d) Government regulators

3. **Which of the following rights does not accompany ownership of a share of stock?**

a) The right to vote in corporate matters

b) The right to share in the distribution of earnings

c) The preemptive right

d) The right to liquidate the company

4. **What preference do holders of preferred stock have over common stockholders?**

a) Preference in voting

b) Preference when dividends are declared

c) Preference in company management

d) Preference in share price appreciation

5. **How do shareholders manage their organization indirectly?**

a) By overseeing day-to-day operations

b) By electing members of the Board of Directors

c) By declaring dividends

d) By setting corporate policies

6. **What is the minimum amount that can be reported as contributed capital?**

a) The market value of shares

b) The par value times the number of shares issued

c) The total assets of the corporation

d) The book value of the shares

7. **If common stock is issued above par value, what is the excess amount called?**

a) Discount

b) Premium

c) Dividend

d) Loss

8. **How is the issuance of common stock for cash above par value recorded?**

a) Debit Common Stock, credit Cash

b) Debit Cash, credit Common Stock and Paid-in Capital in Excess of Par

c) Debit Paid-in Capital in Excess of Par, credit Cash

d) Debit Cash, credit Common Stock only

9. **What happens when non-par stock with no stated value is issued?**

a) The full amount received is credited to the Common Stock account.

b) Only a portion of the amount received is credited to the Common Stock account.

c) The amount received is credited to Retained Earnings.

d) The amount received is debited to Cash and credited to Assets.

10. **How should stock issued for non-cash assets or services be recorded?**

a) At the par value of the stock issued

b) At the book value of the assets or services

c) At the fair market value of the assets or services

d) At the stated value of the stock issued

11. **Preferred stockholders have priority over common stockholders in relation to:**

a) Voting rights

b) Dividend distribution and asset liquidation

c) Management decisions

d) Share price fluctuations

12. **What are dividends in arrears?**

a) Dividends that have been declared but not yet paid

b) Dividends that were not declared in prior periods for cumulative preferred stock

c) Dividends paid out of par value

d) Dividends that are guaranteed to be paid in the future

13. **What is the dividend rate for a 6%, $20 par value preferred stock?**

a) $1.00 per share

b) $1.20 per share

c) $2.00 per share

d) $6.00 per share

14. **What must be disclosed in the notes to the financial statements regarding cumulative preferred
stock?**

a) Dividends declared

b) Market value of the stock

c) Dividends in arrears

d) Number of shares outstanding

15. **Which date does not require a journal entry when dealing with dividends?**

a) Declaration date

b) Date of record

c) Date of payment

d) Date of issue

16. **What happens to retained earnings when a cash dividend is paid?**

a) Retained earnings increase

b) Retained earnings decrease

c) Retained earnings remain the same

d) Retained earnings are credited

17. **What is the result of a stock dividend?**

a) Increase in cash

b) Decrease in total stockholders' equity

c) Transfer of retained earnings to contributed capital

d) Increase in liabilities

18. **What type of preferred stock allows holders to receive additional dividends beyond the regular
amount?**

a) Non-cumulative preferred stock

b) Participating preferred stock

c) Convertible preferred stock

d) Callable preferred stock

19. **What type of preferred stock must be paid both current-year dividends and any unpaid prior-year
dividends before common stockholders receive dividends?**

a) Non-participating preferred stock

b) Cumulative preferred stock

c) Non-cumulative preferred stock

 d) Participating preferred stock

20. **If Omega Ltd issues 30,000 non-par common stocks without a stated value for Br 4, what is the
journal entry?**

a) Debit Cash Br 120,000, Credit Common Stock Br 120,000

b) Debit Cash Br 120,000, Credit Common Stock Br 30,000, Credit Paid-in Capital in Excess of Par Br
90,000

c) Debit Common Stock Br 120,000, Credit Cash Br 120,000

d) Debit Cash Br 120,000, Credit Retained Earnings Br 120,000

21. **How should the issuance of stock for equipment worth Br 150,000 be recorded when the stock
has a par value of Br 2 and 70,000 shares are issued?**

a) Debit Equipment Br 150,000, Credit Common Stock Br 140,000, Credit Paid-in Capital in Excess of
Par Br 10,000

b) Debit Equipment Br 140,000, Credit Common Stock Br 140,000

c) Debit Equipment Br 150,000, Credit Common Stock Br 150,000

d) Debit Equipment Br 140,000, Credit Paid-in Capital in Excess of Par Br 10,000

22. **What does the par value of a share represent?**

a) The market value of the share

b) The legal capital per share

c) The maximum price the share can be sold for

d) The total book value of the company

23. **Which stockholders are entitled to receive dividends first in the event of liquidation?**

a) Common stockholders

b) Preferred stockholders

c) Founding stockholders

d) Treasury stockholders

24. **What is the difference between par value and market value of a share?**

a) Par value is always higher than market value.

 b) Par value is the value assigned in the corporate charter; market value is the current trading price.

c) Market value determines dividends; par value does not.

d) There is no difference between par value and market value.

25. **If Hafbo Inc. issues 20,000 shares of Br 0.50 par value common stock for Br 4 per share, how is the
Paid-in Capital in Excess of Par recorded?**

a) Br 70,000

b) Br 10,000

c) Br 60,000

d) Br 80,000