TestfBankfforfAccountingfPrinciples,fNinthfCanadianfEdition
CHAPTER 13 f
INTRODUCTION TO CORPORATIONS F F
CHAPTER STUDY OBJECTIVES
F F
1.fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.fThefmajorfcharacteristics
foffafcorporationfarefasffollows:fseparateflegalfexistence,flimitedfliabilityfoffshareholders,ftransferablefo
wnershipfrights,fabilityftofacquirefcapital,fcontinuousflife,fgovernmentfregulations,fandfcorporatefinco
meftax.fCorporationsfmustfbefincorporatedffederallyforfprovincially,fandfmayfhavefshareholdersfoffdiffer
entfclasses.fEachfclassfoffsharefcarriesfdifferentfrightsfandfprivileges.fThefrightsfoffcommonfshareholder
sfarefrestrictedftofthefrightftofelectfthefboardfoffdirectors,ftofreceivefafproportionatefsharefoffdividends,fif
fdeclared,fandftofreceivefthefremainingfassetsfiffthefcorporationfisfliquidated.fCorporationsfarefmanaged
fbyfthefboardfoffdirectors.
2.fExplainfsharefcapitalfandfdemonstratefthefaccountingfforfthefissuancefoffcommonfandfpreferredfs
hares.fWhenfsharesfarefissued,fthefentirefproceedsffromfthefissuefbecomeflegalfcapitalfandfarefcreditedf
tofthefCommonfSharesfaccount.fWhenfsharesfarefissuedfforfnoncashfassetsforfservices,ftheffairfvaluefofft
hefconsiderationfreceivedfisfusedfiffitfcanfbefdetermined.fIffnot,ftheffairfvaluefoffthefconsiderationfgivenfu
pfisfused.fThefaccountingfforfpreferredfsharesfisfsimilarftofthefaccountingfforfcommonfshares.
Preferredfsharesftypicallyfdofnotfhavefvotingfrightsfbutfdofhavefpriorityfoverfcommonfsharesftofreceive:f
1.fdividends,fandf2.fassets,fiffthefcompanyfisfliquidated.fThefdividendfisfspecifiedfandfmayfbefcumulativef
orfnoncumulative.fCumulativefpreferredfsharesfmustfbefpaidfdividendsfforfthefcurrentfyearfasfwellfasfan
yfunpaidfdividendsffromfpreviousfyearsfbeforefthefcommonfsharesfreceivefdividends.fNoncumulativefpr
eferredfsharesflosefthefrightftofunpaidfdividendsffromfpriorfyears.fInfaddition,fpreferredfsharesfmayfbefc
onvertible,fredeemable,fand/orfretractable.fConvertiblefpreferredfsharesfallowftheirfholderftofconvertft
hemfintofcommonfsharesfatfafspecifiedfratio.fRedeemablefpreferredfsharesfgivefthefcorporationfthefrigh
tftofredeemfthefsharesfforfcash;fretractablefpreferredfsharesfgivefthefshareholderfthefrightftofconvertfthef
sharesftofcash.
3.fPreparefafcorporatefincomefstatement.fCorporatefincomefstatementsfarefsimilarftofthefincomefstate
mentsfforfproprietorshipsfandfpartnerships,fwithfonefexception.fIncomeftaxfexpensefmustfbefdetermine
dfbasedfonfprofitfbeforeftaxfandfisfreportedfonfthefincomefstatement.fProfitfbeforeftaxflessfincomeftaxfex
pensefisfequalftofprofitfforfthefyear.
4.fExplainfandfdemonstratefthefaccountingfforfcashfdividends.fDividendsfarefsimilarftofdrawingsfinftha
tftheyfarefafdistributionfoffprofitftofthefownersf(shareholders).fEntriesfforfcashfdividendsfarefrequiredfatft
hefdeclarationfdatefandfthefpaymentfdate.fCashfdividendsfreducefassetsfandfshareholders’fequityf(retai
nedfearnings).fPreferredfshareholdersfarefpaidftheirfdividendsffirstfbeforefthefcommonfshareholdersfare
fentitledftofanyfdividends.
13-1
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
,TestfBankfforfAccountingfPrinciples,fNinthfCanadianfEdition
5.fPreparefafstatementfoffretainedfearningsfandfclosingfentriesfforfafcorporation.fRetainedfearningsfa
refincreasedfbyfprofit,fandfdecreasedfbyflossesfandfdividends.fCompaniesfreportingfunderfASPEfarefrequ
iredftofpreparefafstatementfoffretainedfearningsfshowingfthefbeginningfbalance,fchangesfduringfthefyea
r,fandfendingfbalancefoffRetainedfEarnings.fInfafcorporation,fthefIncomefSummaryfandfdividendsfaccou
ntsfarefclosedftofRetainedfEarnings.
6.fPreparefthefshareholders’fequityfsectionfoffthefbalancefsheetfandfcalculatefreturnfonfequity.fWithi
nfthefshareholders’fequityfsectionfoffthefbalancefsheet,fallfcorporationsfwillfreportfcontributedfcapitalfa
ndfretainedfearnings.fWithinfcontributedfcapital,ftwofclassificationsfmayfbefshownfiffapplicable:f1.fshare
fcapitalfandf2.fcontributedfsurplus.fCorporationsfreportingfunderfIFRSfwillfalsofhavefanotherfcomponent
finfshareholders’fequity,fwhichfwillfbefintroducedfinfChapterf14.
Returnfonfequityfisfcalculatedfbyfdividingfprofitfbyfaveragefshareholders’fequity.fItfisfanfimportantfmeas
urefoffafcompany’sfprofitability.
13-2
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
,TestfBankfforfAccountingfPrinciples,fNinthfCanadianfEdition
TRUE-FALSE STATEMENTS F
1.fMostfofftheflargestfCanadianfcompaniesfarefpubliclyfheld.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
2.fAfcorporationfisfaflegalfentityfthatfisfcombinedfwithfthefowner’sfeconomicfcircumstances.
Answer:fFalse
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
3.fAfcorporationfmayfbeforganizedfforfthefpurposefoffmakingfafprofitforfmayfbefnot-for-profit.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
4.fAfpublicfcorporationfisfafcorporationfthatfdoesfNOTfissuefitsfsharesfforfsaleftofthefpublic.
Answer:fFalse
Difficulty:fEasy
Bloomcode:fKnowledge
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
13-3
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
, TestfBankfforfAccountingfPrinciples,fNinthfCanadianfEdition
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
5.fAfcorporationfactsfunderfitsfownfnamefratherfthanfinfthefnamefoffitsfshareholders.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
6.fActsfoffthefshareholdersfwhofarefNOTfofficialfagentsfoffafcorporationfcanflegallyfbindfafcorporation.
Answer:fFalse
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
7.fCreditorsfhavefaccessftofcorporatefassetsfonlyftofhaveftheirfclaimsfrepaid.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
8.fAftransferfoffsharesfbyfafshareholderfdoesfNOTfrequirefthefapprovalfoffeitherfthefcorporationforfotherfs
hareholders.
Answer:fTrue
13-4
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
CHAPTER 13 f
INTRODUCTION TO CORPORATIONS F F
CHAPTER STUDY OBJECTIVES
F F
1.fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.fThefmajorfcharacteristics
foffafcorporationfarefasffollows:fseparateflegalfexistence,flimitedfliabilityfoffshareholders,ftransferablefo
wnershipfrights,fabilityftofacquirefcapital,fcontinuousflife,fgovernmentfregulations,fandfcorporatefinco
meftax.fCorporationsfmustfbefincorporatedffederallyforfprovincially,fandfmayfhavefshareholdersfoffdiffer
entfclasses.fEachfclassfoffsharefcarriesfdifferentfrightsfandfprivileges.fThefrightsfoffcommonfshareholder
sfarefrestrictedftofthefrightftofelectfthefboardfoffdirectors,ftofreceivefafproportionatefsharefoffdividends,fif
fdeclared,fandftofreceivefthefremainingfassetsfiffthefcorporationfisfliquidated.fCorporationsfarefmanaged
fbyfthefboardfoffdirectors.
2.fExplainfsharefcapitalfandfdemonstratefthefaccountingfforfthefissuancefoffcommonfandfpreferredfs
hares.fWhenfsharesfarefissued,fthefentirefproceedsffromfthefissuefbecomeflegalfcapitalfandfarefcreditedf
tofthefCommonfSharesfaccount.fWhenfsharesfarefissuedfforfnoncashfassetsforfservices,ftheffairfvaluefofft
hefconsiderationfreceivedfisfusedfiffitfcanfbefdetermined.fIffnot,ftheffairfvaluefoffthefconsiderationfgivenfu
pfisfused.fThefaccountingfforfpreferredfsharesfisfsimilarftofthefaccountingfforfcommonfshares.
Preferredfsharesftypicallyfdofnotfhavefvotingfrightsfbutfdofhavefpriorityfoverfcommonfsharesftofreceive:f
1.fdividends,fandf2.fassets,fiffthefcompanyfisfliquidated.fThefdividendfisfspecifiedfandfmayfbefcumulativef
orfnoncumulative.fCumulativefpreferredfsharesfmustfbefpaidfdividendsfforfthefcurrentfyearfasfwellfasfan
yfunpaidfdividendsffromfpreviousfyearsfbeforefthefcommonfsharesfreceivefdividends.fNoncumulativefpr
eferredfsharesflosefthefrightftofunpaidfdividendsffromfpriorfyears.fInfaddition,fpreferredfsharesfmayfbefc
onvertible,fredeemable,fand/orfretractable.fConvertiblefpreferredfsharesfallowftheirfholderftofconvertft
hemfintofcommonfsharesfatfafspecifiedfratio.fRedeemablefpreferredfsharesfgivefthefcorporationfthefrigh
tftofredeemfthefsharesfforfcash;fretractablefpreferredfsharesfgivefthefshareholderfthefrightftofconvertfthef
sharesftofcash.
3.fPreparefafcorporatefincomefstatement.fCorporatefincomefstatementsfarefsimilarftofthefincomefstate
mentsfforfproprietorshipsfandfpartnerships,fwithfonefexception.fIncomeftaxfexpensefmustfbefdetermine
dfbasedfonfprofitfbeforeftaxfandfisfreportedfonfthefincomefstatement.fProfitfbeforeftaxflessfincomeftaxfex
pensefisfequalftofprofitfforfthefyear.
4.fExplainfandfdemonstratefthefaccountingfforfcashfdividends.fDividendsfarefsimilarftofdrawingsfinftha
tftheyfarefafdistributionfoffprofitftofthefownersf(shareholders).fEntriesfforfcashfdividendsfarefrequiredfatft
hefdeclarationfdatefandfthefpaymentfdate.fCashfdividendsfreducefassetsfandfshareholders’fequityf(retai
nedfearnings).fPreferredfshareholdersfarefpaidftheirfdividendsffirstfbeforefthefcommonfshareholdersfare
fentitledftofanyfdividends.
13-1
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
,TestfBankfforfAccountingfPrinciples,fNinthfCanadianfEdition
5.fPreparefafstatementfoffretainedfearningsfandfclosingfentriesfforfafcorporation.fRetainedfearningsfa
refincreasedfbyfprofit,fandfdecreasedfbyflossesfandfdividends.fCompaniesfreportingfunderfASPEfarefrequ
iredftofpreparefafstatementfoffretainedfearningsfshowingfthefbeginningfbalance,fchangesfduringfthefyea
r,fandfendingfbalancefoffRetainedfEarnings.fInfafcorporation,fthefIncomefSummaryfandfdividendsfaccou
ntsfarefclosedftofRetainedfEarnings.
6.fPreparefthefshareholders’fequityfsectionfoffthefbalancefsheetfandfcalculatefreturnfonfequity.fWithi
nfthefshareholders’fequityfsectionfoffthefbalancefsheet,fallfcorporationsfwillfreportfcontributedfcapitalfa
ndfretainedfearnings.fWithinfcontributedfcapital,ftwofclassificationsfmayfbefshownfiffapplicable:f1.fshare
fcapitalfandf2.fcontributedfsurplus.fCorporationsfreportingfunderfIFRSfwillfalsofhavefanotherfcomponent
finfshareholders’fequity,fwhichfwillfbefintroducedfinfChapterf14.
Returnfonfequityfisfcalculatedfbyfdividingfprofitfbyfaveragefshareholders’fequity.fItfisfanfimportantfmeas
urefoffafcompany’sfprofitability.
13-2
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
,TestfBankfforfAccountingfPrinciples,fNinthfCanadianfEdition
TRUE-FALSE STATEMENTS F
1.fMostfofftheflargestfCanadianfcompaniesfarefpubliclyfheld.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
2.fAfcorporationfisfaflegalfentityfthatfisfcombinedfwithfthefowner’sfeconomicfcircumstances.
Answer:fFalse
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
3.fAfcorporationfmayfbeforganizedfforfthefpurposefoffmakingfafprofitforfmayfbefnot-for-profit.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
4.fAfpublicfcorporationfisfafcorporationfthatfdoesfNOTfissuefitsfsharesfforfsaleftofthefpublic.
Answer:fFalse
Difficulty:fEasy
Bloomcode:fKnowledge
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
13-3
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
, TestfBankfforfAccountingfPrinciples,fNinthfCanadianfEdition
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
5.fAfcorporationfactsfunderfitsfownfnamefratherfthanfinfthefnamefoffitsfshareholders.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
6.fActsfoffthefshareholdersfwhofarefNOTfofficialfagentsfoffafcorporationfcanflegallyfbindfafcorporation.
Answer:fFalse
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
7.fCreditorsfhavefaccessftofcorporatefassetsfonlyftofhaveftheirfclaimsfrepaid.
Answer:fTrue
Bloomcode:fKnowledge
Difficulty:fEasy
LearningfObjective:fIdentifyfandfdiscussfcharacteristicsfoffthefcorporatefformfofforganization.
SectionfReference:fThefCorporatefFormfoffOrganization
CPA:fFinancialfReporting
AACSB:fAnalytic
8.fAftransferfoffsharesfbyfafshareholderfdoesfNOTfrequirefthefapprovalfoffeitherfthefcorporationforfotherfs
hareholders.
Answer:fTrue
13-4
Copyrightf©f2022fJohnfWileyf&fSonsfCanada,fLtd.fUnauthorizedfcopying,fdistribution,forftransmissionfoffthisfpagefisfstrictlyfprohibited.
