MUHASEBE II

In compliance with accounting perspective, types of entities are based on their ownership, taxation, life, the personal liability of the owners particularly.

The second type of entity is a partnership which has at least two or more owners. In a partnership, the owners are called as partners. Partnerships are organized as small or medium size entities.

Similar to proprietorship, the cancellation of the partnership may be caused either by one of the partners’ death or choice of cancelling it and the partners are personally liable for the partnership’s liabilities. Surely, based on the entity concept the accounting process of a partnership is separate from the personal records of the partners. Partnerships are not separate taxable entities. The correct answer is E.

The first one is proprietorship which is owned by a single owner. This type of entity is the smallest and simplest one among the different types of entities. Proprietorship is an entity owned by a single owner. The owner of proprietorship is called as proprietor and his or her equity can be seen as only one item in owner’s equity section of the balance sheet.

Proprietor is the owner of a sole proprietorship. The expiration of a proprietorship is caused either by the proprietor’s death or his/her choice of ending it. Also, the proprietor is personally liable for the proprietorship’s liabilities. However, the accounting process of the proprietorship is separate from the personal records of the proprietor. Another important characteristic is about taxation.

A proprietorship is not a separate taxable entity. The proprietor pays tax on the income of proprietorship. The correct answer is D.

As an important characteristic, shareholders are not personally responsible for the corporation’s liabilities. This means that shareholders’ possible loss is limited with their capital investment. Hence, the creditors cannot make any claim on shareholders’ personal assets. This characteristic of corporation is essential for the shareholders because their personal assets are protected and the corporation may raise may raise more capital from shareholders. Also, the government and related regulators design more regulations and try to monitor corporations to protect shareholders’ and creditors’ claims. Another characteristic is the transferability of the shares. This characteristic is essential for shareholders since it is flexible. They can transfer corporation’s shares to another one.

The cancellation of the corporation does not depend on the death of any shareholder or their choices to cancel it. In other words, the corporation is a permanent organization. The transfer of the shares, anyone’s death or withdrawal do not put an end to the corporation. The correct answer is D.

As an important characteristic, shareholders are not personally responsible for the corporation’s liabilities. This means that shareholders’ possible loss is limited with their capital investment. Hence, the creditors cannot make any claim on shareholders’ personal assets. This characteristic of corporation is essential for the shareholders because their personal assets are protected and the corporation may raise may raise more capital from shareholders. The correct answer is D.

Another distinguishing difference of a corporation is about taxation. Corporations are taxable entities. All of the corporations have to pay tax. Besides, when corporations make cash payments to the shareholders, double taxation may occur. The imposed taxation is paid by the corporation and the cash received by the shareholders is reported on the income tax return of the shareholder. The correct answer is C.

The cancellation of the corporation does not depend on the death of any shareholder or their choices to cancel it. In other words, the corporation is a permanent organization. The transfer of the shares, anyone’s death or withdrawal do not put an end to the corporation. The correct answer is D.

Liquidation: When a corporation goes out, shareholders may receive their proportionate share of any asset that still remains. The correct answer is C.

Treasury share may be resold above cost. In this case, there will be a difference between the cost and the sale price of the treasury share. If the sale price is higher than the cost of treasury share, this positive difference should be recorded in a new shareholders’ equity account named “Paid-in Capital from Treasury Share”. Paid-in Capital from Treasury Share is reported in the Paid-in Capital section of a corporation’s balance sheet. The correct answer is B.

In very rare cases, shares might be issued below par value. If this seldom transaction occurs, another separate account entitled “Discount on Capital Share” should be debited. The correct answer is A.

A corporation which is organized under state law and owned by shareholders.

Based on the different characteristics of corporations, the advantages and disadvantages may be summarized as follow:

Disadvantages

Having shares of a corporation provides some rights to the shareholders. The general rights of shareholders’ in a corporation is summarized:

In charter, also the maximum number shares that the corporation may issue is determined. This total amount which is allowed by charter is named as “Authorized Share”.

The first time of offering shares to the public is called as initial public offering (IPO).

To record issuance of common share at par value, an asset account, and a new equity account will be used.

            Assume that on January 31, 2018, (A) Inc. authorizes 500,000,000 common shares and then issues 200,000 common shares. The common shares of (A) Inc. carry a par value of 1 TL per share. The journal entry, then, as follows:

Common shares should be recorded at par value even if they have already issued with a different amount. Then a premium should be recorded in an equity account different than Common Share account is named “Paid-in Capital in Excess of Par-Common”.

Remember that outstanding shares are defined as the shares that have already issued and also held by shareholders before. If a corporation has treasury shares they should be subtracted from the number of outstanding shares because of treasury shares held by the corporation not by shareholders. With this perspective, treasury shares don’t have the right to vote and receive dividends as they are not outstanding shares.

A preferred share is already defined as a type of capital share that provides some advantages to
its owner over a common share.

According to the agreements, a preferred share may provide some other priorities and privileges such as convertibility. But the most important priorities of a preferred share are “dividends” and “assets in the event of liquidation”.