Question

1. You own stock in Google and ExxonMobil. Which of the two companies would you expect to have a higher dividend payout ratio? Why?

2.Your company is going to build a new factory. It is debating whether to issue stock to raise the money or to sell bonds. Understand the advantages and disadvantages of each.

3.When you get paid in advance for services to be provided later, what kind of account do you credit to offset the debit to cash?

4/Advantages and disadvantages of the corporate form of organization

Answer 1

1. Google would have a higher dividend payout ratio compared to ExxonMobil since ExxonMobil's financial performance has dropped in the last decade.

2. Advantages & Disadvantages:

Advantages
Stock	Bonds
1. Dividends are paid to stockholders only when the company earns profits.	1. Bonds are relatively cheaper to issue and raise funds on a short term basis.
2. Stockholders may be repaid only during the winding up of the corporation.	2. The Interest paid on bonds are tax deductible.
Disadvantages
1. Stockholders have ownership rights in the company and can exercise their vote during meetings to take decisions.	1. A fixed rate of interest has to be paid as per the terms of issue of bonds.
2. Dividends paid to stockholders are from profits net of tax. Hence there are no tax benefits.	2. The entire amount of the bond has to be paid within the stipulated time period.

3. The Entry would be as follows:

Cash (Dr.)

Unearned Service Revenue (Cr.)

Hence, the corresponding credit is given to Unearned Service Revenue, which is a liability account. On non performance of the service, the cash received will have to be returned to the customer, hence it is a liability in the books of accounts.

4. Advantages:

• Seperate Legal Entity - The corporate form of business organization is a seperate legal entity and its existence does not depend on the existence of its promoters / founders / directors.
• Perpectual Life - Due to its seperate legal existence, the corporate orgnaization enjoys a perpetual life and continues until it is wound up.
• Induce Capital - The corporate form of organization is more reliable and hence can induce capital by issuing its own stock as well as by issuing bonds.

Disadvantages:

• Extensive Compliances - There are extentive compliances and procedures to establish an entity as a legal corporate and also on a yearly basis once it has been established.
• Effect of Double Taxation - Not only does the corporate entity pay taxes on the net profits earned by it, the stockholders are also liable to pay taxes on the dividends received from the tax paid profits.
• Management is seperate from the owners - In a corporate form of organization, the stockholders are the true owners of the company but they do not participate in the day to day activities of the organizations. Instead, a Board of Directors are elected to manage the corporate's business.