Chapter 2: The Business, Tax, and Financial Environments
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1.Which of the following enjoys limited liability?A general partnership.A corporation.
A sole proprietorship.
None of the above.
2.Michael Cohn is a "member" (a type of owner) of a marine supply business. Michael's business is a sole proprietorship.
a corporation.
a limited liability company.
a general partnership.
3. The Counting House, Inc., purchased 5-year property class equipment for $60,000. It uses the MACRS method of depreciation. What is tax depreciation for the second year of the asset's life?$12,000
$19,200
$20,000
$24,000
4.A corporation in which you are a shareholder has just gone bankrupt. Its liabilities are far in excess of its assets. You will be called on to pay:a proportionate share of bondholder claims based on the number of common shares
that you own.
a proportional share of all creditor claims based on the number of common shares
that you own.
an amount that could, at most, equal what you originally paid for the shares of
common stock in the corporation.
nothing.
5.A 30-year bond issued by Gary's Plaid Pants Warehouse, Inc., in 1997 would now trade in theprimary money market.
secondary money market.
primary capital market.
secondary capital market.
6.A major advantage of the corporate form of organization is:reduction of double taxation.
limited owner liability.
legal restrictions.
ease of organization.
7.Money market mutual fundsenable individuals and small businesses to invest indirectly in money-market instruments.
are available only to high net-worth individuals.
are involved in acquiring and placing mortgages.
are also known as finance companies.
8.The purpose of financial markets is to:increase the price of common stocks.
lower the yield on bonds.
allocate savings efficiently.
control inflation.
9.Which of the following is NOT an example of a financial intermediary?International Business Machines, Inc. (IBM).
Vanguard Mutual Fund.
El Dorado Savings and Loan Association.
Bank of America.
10.How are funds allocated efficiently in a market economy?The most powerful economic unit receives the funds.
The economic unit that is willing to pay the highest expected return
receives the funds.
the economic unit that considers itself most in need of funds
receives them.
Receipt of the funds is rotated so that each economic unit can receive
them in turn.
11.Assume that a "temporary" additional (US federal tax related) first-year bonus depreciation of 50 percent applies to a new, $100,000 piece of equipment purchased by Bellemans Chocolatier, Inc. The asset has a $10,000 estimated final salvage value. If this asset is fully depreciated for tax purposes over its useful life, the overall amount that Bellemans will have depreciated for tax purposes is .$90,000
$100,000
$135,000
$150,000
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April 29, 2022/ Steven Bragg
A corporation is a legal entity, organized under state laws, whose investors purchase shares of stock as evidence of ownership in it. The advantages of the corporation structure are as follows:What are the Advantages of a Corporation?
Limited liability. The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability, so their personal assets are protected. This is a particular advantage when a business routinely takes on large risks for which it could be held liable.
Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds. This is a particular advantage when its shares trade on a stock exchange, where it is easier to buy and sell shares.
Ownership transfers. It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held.
Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors.
Pass through. If the corporation is structured as an S corporation, profits and losses are passed through to the shareholders, so that the corporation does not pay income taxes.
What are the Disadvantages of a Corporation?
The disadvantages of a corporation are as follows:
Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.
Excessive tax filings. Depending on the kind of corporation, the various types of income and other taxes that must be paid can require a substantial amount of paperwork. The exception to this scenario is the S corporation, as noted earlier.
Independent management. If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.
A private company has a small group of investors who are unable to sell their shares to the general public. A public company has registered its shares for sale with the Securities and Exchange Commission (SEC), and may also have listed its shares on a stock exchange, where they can be traded by the general public. The requirements of the SEC and the stock exchanges are rigorous, so comparatively few corporations are publicly-held.