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Monika Nepal
Prof. Mark Chambers
Acc- 281
October, 2019
Chapter 11
11.1 Ans: The advantages of organizing my Scuba diving school as a Corporation are as below:
• The greatest advantage would be limited personal liability as the stockholders would not
be liable for the debts of the corporation.
• The corporation would continue to operation in spite of the change sin names and
identities of stockholders.
• There would be flexibility in being owner through the transfer shares as the share would
be easily sold by one investor to another.
However, along with these advantages there would be some disadvantages to be considered.
They are as below:
• Taxation would be double as there would be taxation for income and dividends.
• It requires a huge amount of capital to establish a corporation as compared to small
business.
• The stockholders sometimes may not act according to the business rules and regulations
and hence may affect the management.
The advantages and disadvantages of organizing my Scuba diving school as a Sole
proprietorship are as below:
• It would be easy to form, and I would have full control over the business.
• There would be minimal legal costs to forming a sole proprietorship.
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• There would not be any corporate tax payments.
However, along with these advantages there would be some disadvantages to be considered.
They are as below:
• As I would be the single owner, all the responsibilities fall on the shoulders of me.
• Investors would not readily invest as they would not take risk to invest in a small
business.
• There would be a lot of loans and hence liabilities would increase, as it would require
money to initially finance the business.
b. As per my opinion, Sole Proprietorship would be a better organization because it can be easily
formed and has less taxation. Although it would be a small business, there would be less works
and less burden for me, being the owner. Ans a small business has less trouble and loans to be
cleared as compared to a larger one.
11.4 Ans: The required calculations are as follows:
Total dividends paid in the third year = $736,000
Dividends on the 8% cumulative stock = $50 × 8% × 40,000 × 2 years
= $320,000
Current years dividends = $50 × 8% × 40,000
= $160,000
So, Total dividends paid = $320,000 + $160,000 = $480,000
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Dividends on the 12% noncumulative stock = $100 × 12% × 8,000 =$96,000 (There is no
calculation for the current year and previous two years, being noncumulative)
Dividends on common stock for third year = $736,000 – ($480,000 + $96,000) = $160,000
b. ans The calculations for dividends per share are as follows:
• 8% cumulative stock = $480,000 ÷ 40,000 = $12 per share
• 12% noncumulative stock = $96,000 ÷ 8,000 = $12 per share
• Common stock = $160,000 ÷ 400,000 = $0.4 per share
c. ans As there is no any additional payments in capital, the average issuing price is the same as
given. Which means the price is $50 for 8% preferred stock and $100 for 12% preferred stock.
