Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 11-1

The most important characteristics of a corporation that distinguish it from a proprietorship or partnership are as follows:

1. Separate legal existence.

   As an entity separate and distinct from its owners, the corporation acts under its own name rather than in the name of its stockholders. A corporation may buy, own, and sell property, borrow money, and enter into legally binding contracts in its own name. It may also sue or be sued, and it pays its own taxes.

   In contrast to a partnership, in which the acts of the owners (partners) bind the partnership, the acts of the owners (stockholders) do not bind the corporation unless such owners are duly appointed agents of the corporation.

2. Limited liability of stockholders.

   Since a corporation is a separate legal entity, creditors ordinarily have recourse only to corporate assets to satisfy their claims. The liability of stockholders is normally limited to their investment in the corporation, and creditors have no legal claim on the personal assets of the owners unless fraud has occurred. Thus, even in the event of bankruptcy of the corporation, stockholders' losses are generally limited to their capital investment in the corporation.

3. Transferable ownership rights.

   Ownership of a corporation is shown in shares of capital stock, which are transferable units. Stockholders may dispose of part or all of their interest in a corporation simply by selling their stock. In contrast to the transfer of an ownership interest ...