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Chapter 13: Q1SE_2 (page 702)

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

2. What are some disadvantages of organizing as a corporation?

Short Answer

Expert verified

Answer

Corporates are obliged to pay double tax on its earnings and there might be conflict of interest as the ownership and management are not in the same hands. The incorporation process is expensive and complex.

Step by step solution

01

Basic introduction-

Corporation is considered as a legal entity that is distinct from its owners and have its separate existence in the eye of law. It possesses similar rights and responsibilities as an individual may have.

02

Disadvantages of organization as a corporation-

The corporation's revenue is subject to double taxation.

Ownership and management are separated as shareholders are the owners and directors are the managers.

Compare to other business forms the start-up costs are higher.

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Most popular questions from this chapter

Analyzing the effect of prior-period adjustments

Taylor Corporation discovered in 2019 that it had incorrectly recorded in 2018 a cash payment of \(70,000 for utilities expense. The correct amount of the utilities expense was \)35,000.

Requirements

2. How should this error be reported in the 2019 financial statements?

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

1. What is the main advantage they gain by selecting a corporate form of business now?

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.

f. Entity can raise more money than a partnership or sole proprietorship

Computing earnings per share

HEB Corporation had net income for 2018 of \(60,450. HEB had 15,500 shares of common stock outstanding at the beginning of the year and 20,100 shares of common stock outstanding as of December 31, 2018. During the year, HEB declared and paid preferred dividends of \)2,600. Compute HEB’s earnings per share.

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders’ equity

The balance sheet of Goldstein Management Consulting, Inc. at December 31, 2017, reported the following stockholders’ equity:

Common Stock—\(10 Par Value; 350,000 shares

authorized, 32,000 shares issued and outstanding

Paid-In Capital:

160,000

\) 320,000

650,000

Retained Earnings

Total Stockholders’ Equity \( 810,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 330,000

Total Paid-In Capital

During 2018, Goldstein completed the following selected transactions:

Feb. 6 Declared a 15% stock dividend on common stock. The market value of

Goldstein’s stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,300 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.10 per share cash dividend on the common stock outstanding.

Requirements

2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume Goldstein’s net income for the year was $90,000.
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