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Chapter 13: Q1SE_1 (page 708)

Question - Describing corporation characteristics

Due to recent beef recalls, Southwest Steakhouse is considering incorporating. Bob, the owner, wants to protect his personal assets in the event the restaurant is sued.

Requirements

1. Which advantage of incorporating is most applicable? What are other advantages of organizing as a corporate entity?

Short Answer

Expert verified

Answer

The company is considered as separate legal entity and have a perpetual succession. It does not allow its stockholders to be bonded by any contract and they have limited liability.

Step by step solution

01

Basic introduction-

Corporate entity: Entity structure established with the purpose of running a business and hold assets on the name of company and includes shareholder, directors, investors, and other stakeholders is known as corporate entity.

02

Most applicable advantage of incorporating and other advantages-

It does not permit stockholders to tie the business to an agreement.

There exists limited liability for stockholders.

The corporation has continuous life.

No mutual agency is found between the stockholders and the corporation.

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Most popular questions from this chapter

What is a stock dividend?

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of \(550,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

3. If they decide to issue \)3 par common stock and anticipate an initial market price of \(75 per share, how many shares will they need to issue to raise \)3,000,000?

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity

Gullo Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 18,900 \) 24,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 200,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 sharesauthorized, 10,000 shares issued and outstanding\) 90,000 \( 90,000

Common Stock—\)1 Par Value; 45,000 sharesauthorized, 30,000 shares issued and outstanding

30,000 30,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 51,000 42,000

Total Stockholders’ Equity \( 185,000 \) 176,000

Learning Objectives 3, 4, 6

2. Retained Earnings Dec. 31,

2018 \(218,280

Requirements

1. Compute Gullo Company’s earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest cent.

2. Compute Gullo Company’s price/earnings ratio for 2018. Assume the company’s market price per share of common stock is \)9. Round to two decimals.

3. Compute Gullo Company’s rate of return on common stockholders’ equity for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest whole percent.

Question: Identifying sources of equity, stock issuance, and dividends

Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—5%, ? Par Value; 625,000 shares

authorized, 325,000 shares issued and outstanding

Paid-In Capital:

\( 1,300,000

1,350,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,600,000

Total Paid-In Capital 5,250,000

Retained Earnings 11,800,000

Total Stockholders’ Equity \) 17,050,000

Common Stock—$1 Par Value; 7,000,000 shares

authorized, 1,350,000 shares issued and outstanding

Requirements

2. What is the par value per share of Tillman Comfort Specialists’ preferred stock?

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

a. Ownership and management are separated.
See all solutions

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