Corporations:

A corporation is a seperate legal entity that has an identity of its own. Thus, the assets of the corporation belong to the corporation & not the shareholders. The law sees the corporation as an individual. Items may be purchased in its name.



Advantages:

Limited liability of shareholders:

Shareholders only may lose the amount of their investment & not any personal assets.

Ease of accumulating capital:

Shareholders purchase company shares & monies are easily collected this way for expansion.

Transferability of shares:

Shareholders can easily transfer share ownership with little or no difficulty.

Continuous existence:

Regardless of a shareholder or Board of Directors passing on, the company continues to operate.

Professional management:

The company is directed & monitored, for the interest of shareholders, by the Board of Directors.



Disadvantages:

Greater regulation:

There are many tax & setup regulations for corporations that add to their costs.

Separation of ownership & control:

May benefit growth & earnings but could result in unwise investment of shareholder money.

Double taxation:

The revenue is taxed once & then taxed again when it is payed out as dividends.





Shareholders equity:

Retained earnings (RE):

Represents all the profits & losses for the corporation over time.

@ year-end, the Income Summary account is closed out to RE instead of capital.



Rights of shareholders

Vote for directors





Share in income by receiving dividends declared by the board of directors.



Share in the distribution of assets only if the company is liquidated.

If a corporation closed, creditors are paid first. Remaining assets are distributed among shareholders.



Pre-emptive right...

Entitles shareholders to maintain percentages of ownership in the company.



Additional Notes:

Each share of capital stocks generally entitled to one vote.

Definitions:

Donated capital:

Represents any form of an asset given to a company as incentive to locate there & thus provide employment to individuals in that city.

E.g. Toronto donates land worth $267,000 to Pepper Inc. to locate within its city, May 15/99

Land $267
Donated cap. $267


Subscriptions:

A form of a "layaway" to purchase stock, in installments, at a future price. This is an incentive for the small shareholder to purchase stock. The shares do not become ownership of the purchaser until paid in full.

Once paid in full, the common stock "subscribed" is turned into common stock.

New Accounts:

Common stock subscribed (CR)

Subscription receivable (DR)

E.g. :

May 7 Sub rec
Com stock sub
May 26 Bank
Sub rec
Jun 26 Bank
Com stock sub
Sub rec
Com stock


Issuance of stocks:

E.g. At the close of the TSE on Friday April 30, Esso's shares sold were as follows:

1000 @ $30-- Common stock

2000 @ $29.75 Preferred, class A, cumulative $ 3.00

Retained earnings as of April 30 has a DR balance of $422,310. Donated capital is $210,000. Common stock subscribed CR balance is $110,000. Preferred stock has a CR balance of $100,000 & Common stock has a balance of $60,000. Both types of stocks have issued 60,000 shares & unlimited authorised as @ April 30.

Prepare the Shareholder's Equity section @ the close of April 30.



Shareholder's Equity:

Cumulative, $3 preferred, issued & outstanding 62000,

unlimited authorised, class A

$159,500
Common stock, issued & outstanding 61000, unlimited authorised $90,000
Common stock subscribed $110,000
Donated capital $210,000



Income Taxes in Corporate Financial Statements





Taxable income = revenues = expenses or deductions (Only those allowed by Revenue Canada)



At the end of the accounting period, the estimated amount of a corporation's income taxes expense is recorded in an adjusting entry.



Income taxes Expense $ 100
Income taxes payable $ 100


Corporate income taxes cannot be determined with precision until year-end when income tax return is prepaid.



Formation of a Corporation



Necessary costs for corporations:



Balance sheet

Other Assets

organization costs



Income tax rules permit three-quarters of the costs to be written off at an annual rate of 7% (declining balance method).



Materiality

permits departures from theoretical concepts on grounds of convenience if the practice inquisition will not cause any material distortion of the net income.