Question

1. Describe what is meant by a prior period adjustment, and give 2 examples.

2. List and explain the advantages of a corporation.

3. List and explain the disadvantages of a corporation.

Answer 1

Answer to 1

A prior period adjustment can be one of the following:

• A correction of an error in the financial statements that were reported for a prior period
• Adjustments caused by the realization of the income tax benefits arising from the operating losses of purchased subsidiaries before acquisition.

Examples of prior period adjustment:

1) In 2017, a company incorrectly charged furniture for promotion expense amounting to $ 35000. The error was discovered in the year 2018. The correcting journal entry is

Retained Earnings DR $ 35000

To Furniture $ 35000

2) At the end of 2017, a company failed to accrue telephone expense that was paid at the beginning of 2018. The correct entry on 31.12.2018 is

Retained Earnings DR $ 16000

To Telephone Expense A/c $ 16000

Answer to 2 and 3

The advantages of a corporation are:

1) Limited Liability- The shareholders in case of a corporation are only liable to the amount of their investment. The corporate entity shields them from any further liability.

2) Perpetual Life- A corporation has no limit in terms of its life since the ownership of ot can pass through many generations of investors.

3) Ownership Transfer- It is not difficult for a shareholder to sell shares in a corporation, though this iit is more difficult in case of a privately held entity.

The disadvantages of a corporation are:

1) Double Taxation: On the basis of the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends which they receive, so income can be taxed twice.

2) Excessive Tax filings- On the basis of the kind of corporation, the various types of the income and other taxes that must be paid can require a substantial amount of paperwork.