1.

Distinguish corporation, partnership, and sole proprietorship in terms of:

Sole Proprietorships: Basically, a sole proprietorship is not a legal entity, and refers to a
business which is solely owned by one person. This one person is personally liable for the
debts and expenses of this type of business. This is the simplest form for a company to
use. They are advantageous to owners because they are simple to form, and have nominal
costs compared to other types of ownership. However, sole proprietorships are
problematic because the owner's personal assets can be reached by creditor's for business
matters.

Partnerships: This is a business owned by two or more people, who share equally in
profits and losses. Partnerships involve a number of different legal considerations that
you should familiarize yourself with. Also, there are different types of partnerships (such
as general partnerships, limited partnerships, joint ventures), so you need to have a good
understanding of what will work best for your company.

Corporations: These are separate legal entities that are owned by the shareholders.
Corporations are much more complex and are typically used by larger businesses. They
have more costly administrative fees and more complicated tax and legal requirements.
Corporations are afforded the opportunity to sell ownership shares through stock
offerings. There are also different classifications of Corporations (such as C-Corps, S-
Corps, Closely Held Corps.), so once again, you will need to have a good idea of what
your company's best option is.

a. Ownership account

For many new businesses, the best initial ownership structure is either a sole
proprietorship or -- if more than one owner is involved -- a partnership.
A sole proprietorship is a one-person business that is not registered with the state like
a limited liability company (LLC) or corporation. You don't have to do anything
special or file any papers to set up a sole proprietorship -- you create one just by
going into business for yourself. Legally, a sole proprietorship is inseparable from its
owner -- the business and the owner are one and the same. This means the owner of
the business reports business income and losses on his or her personal tax return and
is personally liable for any business-related obligations, such as debts or court
judgments. Similarly, a partnership is simply a business owned by two or more
people that haven’t filed papers to become a corporation or a limited liability
company (LLC). You don't have to file any paperwork to form a partnership -- the
arrangement begins as soon as you start a business with another person. As in a sole
proprietorship, the partnership's owners pay taxes on their shares of the business
income on their personal tax returns and they are each personally liable for the entire
amount of any business debts and claims. Sole proprietorships and partnerships make
sense in a business where personal liability isn't a big worry -- for example, a small
service business in which you are unlikely to be sued and for which you won't be
borrowing much money for inventory or other costs.

b. Equity section of the statement of the financial position

 The Equity Section for a Sole Proprietor
The equity section of a sole proprietorship is rather simple. It consists of only one
account called CAPITAL. Capital can be referred to as an owner's direct investment
into their company. These investments usually occur within the initial stages of the
company's formation, however, a owner may contribute cash or other assets into the
company at anytime.
An existing sole proprietor and print off a financial statements every month, may
notice a different capital account balance each month because the capital account will
always change if one of the following events occur;
1. When additional cash or other assets are invested into the company
2. When the owner withdraws cash from the business
3. When the company makes a profit or incurs a loss (income statement)
Equity Section for a Partnership
The equity section of the balance for a partnership is the very same as that of a sole
proprietor. A partnership also uses a capital account to keep track of each owner's
investment. In other words, a sole proprietor has one capital account to track the sole
owner's investment, while a partnership has a capital account for each owner.
The Equity Section for a Corporation:
The equity section of a corporation, however does not use the capital account to
illustrate the investments made into the company. Rather it uses "shares" accounts to
show all the investments contributed by its owners. In addition, a corporation is
required by law to distinguish between the company's investors (contributed capital
by its owners) and the company's earnings over the years. Therefore, corporations use
accounts called common shares, preferred shares (and/or other classes of shares),
along with an account called retained earnings. The shares account show the
investments made by owners (shareholders) into the company. The retained earnings
account keeps track of all the company's earnings and all the dividends paid to the
owners (shareholders) over the years of the corporation's life.
In summary, the equity section of a corporation shows the same items as the equity
section of a sole proprietorship or a partnership. The only difference, however, is the
name applied to the accounts. Moreover, an unincorporated business only shows a
capital account for each owner, while an incorporated business shows a shares
account and a retained earnings account. Below summarizes the structure for each
type of business.

c. Closing the income summary account

2. Definition of Shareholders Equity and its elements

Shareholders' equity represents the interest of a company's shareholders in the net
assets of the company. It equals the excess of a company's total assets over its total
liabilities.
A company's total assets are either brought in by the shareholders or financed by the
creditors. Creditors are entitled to the assets to the extent of the total funds they have
contributed. The residual interest lies with the shareholders who enjoy all profits and
bear all losses. This fundamental relationship is expressed in the form of accounting
equation, which is as follows:
Assets = Liabilities + Shareholders' equity
In case of a sole proprietor, the residual interest is called 'capital' while in case of a
partnership the residual interest is the sum of individual capital of all the partners.

Components
In case of companies, shareholders equity has the following possible components:

Common stock
Common stock represents interest of shareholders who are owners of the company,
who have voting powers, who are the ultimate recipients of all profits and losses
after interest and preferred dividends are paid, and who bear any loss or enjoy any
gains in event of winding up.
Common stock = Number of shares issued × par value per share
Number of authorized share capital with reference to common stock is the number of
shares the company is legally entitled to issue. Number of shares issued is the
number of shares the company has actually issued since its formation.

Preferred stock
Preferred stock represents the shareholders who have secondary interest in the
residual assets because they do not normally have voting powers, who enjoy a fixed
dividend before anything is paid to common shareholders and who have preference
over common stock holders in case of winding up.
Preferred stock = Number of preferred shares issued × par value per share

Additional paid-up capital

Additional paid-up capital (also called share premium) represents the amount
received from investors on all shares issued by a company is excess of the balance in
common stock account.
Additional paid-up capital = Number of shares issued × (share price – par value)
Additional paid-up capital account accumulates all the share premium received since
formation.

Contributed capital
Contributed capital is the total consideration received from shareholders in return of
the ownership right.
Contributed capital = common stock + additional paid-in capital
Contributed capital = shares issued × issue price
Retained earnings
Retained earnings (or accumulated earnings) or accumulated losses is the amount of
earnings accumulated from previous periods. Retained earnings increase by the
amount of net income for a period and decrease on account of dividend payments
and restatement, if any.
Retained earnings at the start of a period
+ Net income for the period
- Dividends paid
± Restatement on account of accounting policy changes or errors
= Retained earnings at the end of a period

Foreign currency translation reserve

Foreign currency translation reserve accounts for the net effect on shareholders
equity when a company's financial statements are converted from its functional
currency to its presentation currency.

Available for sale securities reserve

Available for sale securities reserve accounts for fair value changes in the available
for sale securities. While the realized income and loss from available for sale
securities is included in the net income, unrealized gains and losses i.e. fair value
changes are reflected directly in shareholders equity.

Cash flow hedge reserve

Reserve for cash flow hedge represents effective changes in fair value of a hedging
item. For example, if a company has hedged a bond with an option, changes in value
of the option which successfully offsets changes in fair value of the bond is
accounted for in reserve for cash flow hedge.

Revaluation surplus
Revaluation surplus (or revaluation reserve) appears in IFRS financial statements
and it accounts for changes in value of property, plant and equipment for which a
company has adopted the revaluation model. Upward revaluation is credit to
revaluation surplus and downward revaluation is debited to the account with any
excess taken to the income statement.

Treasury shares
Treasury shares are a company's common shares which the company has purchased
back. Treasury shares account is a contra-equity account, i.e. its has a debit balance
in contrast with the normal credit balance of equity accounts. It is subtracted from
the sum of all other shareholders equity components.

Non-controlling interest (minority interest)

 Non-controlling interest is a shareholders equity component that appears in case of
consolidated financial statements. It represents the shareholders equity attributable to
owners other than the parent company, i.e. those shareholders who do not have
controlling stake in the company

3. Discuss memorandum entry from journal entry methods and give their pro-forma
entries.
4. Differentiate par value, state value and market value.

5. State the rules when a share capital is issued

a. Above par or above state value

b. For a consideration lesser than its par value or state value
c. Without par value

6. Discuss legal capital and trust fund

Trust fund doctrine is a principle of judicial invention which says that corporate assets are
held as a trust fund for the benefit of shareholders and creditors and that the corporate
officers have a fiduciary duty to deal with them properly. The subscribed capital stock of
the corporation is a trust fund for the payment of debts of the corporation which the
creditors have the right to look up to satisfy their credits. The creditors can use it to
reduce the debts, unless it has passed into the hands of a bona fide purchaser without
notice.
The trust fund doctrine usually applies in four cases:
(a) Where the corporation has distributed its capital among the stockholders without
providing for the payment of creditors;
(b) where it had released the subscribers to the capital stock from their subscriptions;
(c) where it has transferred the corporate property in fraud of its creditors;
(d) where the corporation is insolvent.

7. What are the bases of valuation if share capital is issued for cash or non cash?
8. What is the account ting procedure when there is a delinquent subscription with or
without a highest bidder?

When a subscriber fails to pay his subscription on the call date, the corporation sends
several notices to remind him of his obligation. If these notices are ignored by the
subscriber, his subscription is declared delinquent. The delinquent subscription is offered
for sale in a public auction.
1.The sale of the delinquent subscription is issued to the highest bidder.
2.The highest bidder is the one who is willing to pay the unpaid balance of the subscription plus
accrued interest plus all expenses related to the sale and is willing to receive the smallest number
of shares.
3. Once the subscription is fully paid, all subscribed shares are issued. Shares are first given to
the highest bidder. The excess shares are given to the defaulting subscriber.
4. If there is no bidder, all of the delinquent shares will be issued in the name of the corporation.
Such shares are considered treasury shares. The defaulting subscriber does not get any share of
stock"

9. What are the rules when different types of share capital are sold for lump sum?
A corporation may issue different types of stocks in a single transaction in exchange of a lump-
sum of cash or other assets or services. For example, common stock and preferred stock may be
issued in exchange of a single sum of cash or machinery. To record such transactions it is
necessary to determine the portion of lump-sum cash or the value of property obtained to be
allocated to each class of stock.
Usually the lump-sum amount is apportioned to each class of stock issued on the basis of the
market values of each class of stock. This method is called the apportionment method. It uses the
following formula to calculate the amount of lump-sum to be allocated to each class of stock:
A
Apportionment = × C
B
Where,
A is the market value of a particular class of stock issued for lump-sum;
B is the total market value of all the stocks issued for lump-sum; and
C is the lump-sum cash received or, in case of some other asset or service, its fair market
value.
When two classes of stocks have been issued for a lump-sum and the market value of one class is
known and that of the other is unknown, then the incremental method should be employed.
According to incremental method, the portion of lump-sum equal to the stock's market value
would be allocated to that class of stock and rest will be allocated to the other class.
Once the amount to be apportioned to each class of stock is calculated, the issuance of stocks is
recorded via separate journal entries for each class of stock in such a way as if there had been
separate transactions for each class of stock. This is illustrated the following example: