55. Irene Andrews is purchasing the assets of a sole proprietorship from Seth. T

Question

55. Irene Andrews is purchasing the assets of a sole proprietorship from Seth. The fair market values of the assets as agreed to by Irene and Seth as follows:
Asset Seth's Adjusted basis Fair Market Value
Accounts recievable $ -0- $10,000
Notes recievable 15,000 20,000
Machinery & Equip. 85,000 110,000
Building 100,000 320,000
Land 200,000 350,000
The purchase price is $950,000.
a. Calculate Seth's realized and recognized gain.
b. Determine Irene's basis for each ot the assets.
c. Write a letter to Irene informing her of the tax consequences of the purchase. Her address is 300 Riverside Drive, Cincinnati, OH 45207.

Explanation / Answer

a. Calculate Seth's realized and recognized gain. Amt Realised 950,000 Less : Adj Basis (400,000) ------------------------ Realised gain $550,000 So Recognised gain $550,000 b. Determine Irene's basis for each ot the assets. Acct Rxable $10,000 Note Rx $20,000 Mach & Eqpt $110,000 Bldg $320,000 Land $350,000 Goodwill $140,000 ------------------------ $950,000 ------------------------ The basis for each of listed assets is Fair Mkt value. Residual method results in Goodwill bein lbalance of $140000 ($950,000-810,000). c. ABC CPA 47 Tree Av Cincianati, OH Mmddyy Ms Irene 300 Riverside Drive, Cincinnati, OH 45207 Dear Ms Andrews Property Transcations : Tax consequences This refers your inquiry abt your proposal to purch assets of Seth's SOle propritorship. Your $950,000 purch price would be allocated among assets to produce following adjusted basis for each asset :- Acct Rxable $10,000 Note Rx $20,000 Mach & Eqpt $110,000 Bldg $320,000 Land $350,000 Goodwill $140,000 ------------------------ $950,000 ------------------------ Goodwill of $140,000 represent diff between $950,000 proposed purch price and total fair mkt value of each of other assets of $810,000 If I can be of any addl assistance, pl do let me know Sincerely ABC, CPA Partner

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