1. During the current year, Ecru Corporation is liquidated and distributes its o
ID: 2479080 • Letter: 1
Question
1. During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of the distribution, the land has a basis of $250,000, a fair market value of $650,000, and is subject to a liability of $500,000. Kena, who takes the land subject to the liability, has a basis of $120,000 in the Ecru stock. With respect to the distribution of the land, Which of the following is correct?
a. Kena recognizes a gain of $530,000
b. Ecru Corporation recognizes a gain of $250,000
c. Kena recognizes a gain of $30,000
d. Kena has a basis of $250,000 in the land
(The answer is c. but show your work on how they got to this answer)
2. To carry out a qualifying stock redemption, Turaco Corporation (E&P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in shares redeemed. Which of the following is correct statement regarding the tax consequesnces of this redemption?
a. Aida will have $400,000 of dividend income
b. Aida will have a $100,00 basis in land
c. Turaco Corporation will recognize a gain of $50,000
d. Aida will recognize a gain of $30,000
(Answer is d. but show your work on how they got to this answer)
3. Canary Corporation has 5,000 shares of stock outstanding. It redeems in qualifying stock redemption 1,200 shares for $475,000 at a time when it has paid-in capital of $300,000 and E&P of $1.5 million. What would be the charge to Canary's E&P as a result of the redemption?
a. $72,000
b. $300,000
c. $432,000
d. $475,000
e. None of the above
(The answer is e. but show your work on how to get answer)
Answer the three questions and show your work please!
Explanation / Answer
1)correct option is "C" -Kena recognizes a gain of $30,000
Value in basis of land = 650000-500000=150000
Basis in stock = 120000
Gain = 150000-120000= 30000
2)correct option is "D" -Aida will recognize a gain of $30,00
Basis in property received = 400000-300000 = 100000
Basis in stock = 70000
Gain = 30000
3)% of redemption = 1200 / 5000 = .24 or 24%
Basis in redemption = 300000+ 1500000 = 1800000 *.24 = 432000
charge = 475000- 432000 = 43000
correct option is "E" - none of above
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