Five individuals transferred property to NEWCO on 1-1-Y4 with each receiving 20%
ID: 2481483 • Letter: F
Question
Five individuals transferred property to NEWCO on 1-1-Y4 with each receiving 20% of NEWCO's common stock. Jake transferred a receivable for his 20% interest. The receivable was a result of an installment sale made on 1-1-Y1 for $1,000,000 when the property had a basis of $400,000. The buyer paid $100,000 to Jake in Y1 and signed a 6% annual interest note for $900,000 with payments of $225,000 each December 31 plus interest. All payments have been made as of 12-31-Y3 when Jake transfers the note to the new corporation. Determine:
A. Jake's gain or loss on transfer on 1-1-Y1 _________________
Explanation / Answer
Year
Receivable balance
Interest
Repayment
1
$900,000.00
$54,000.00
$225,000.00
2
$675,000.00
$40,500.00
$225,000.00
3
$450,000.00
$27,000.00
$225,000.00
4
$225,000.00
$13,500.00
$225,000.00
$135,000.00
$900,000.00
Gain on transfer made on 1-1-Y1 = Gain on sale + Interest income = ($1,000,000 - $400,000) + $135,000 = $735,000
Year
Receivable balance
Interest
Repayment
1
$900,000.00
$54,000.00
$225,000.00
2
$675,000.00
$40,500.00
$225,000.00
3
$450,000.00
$27,000.00
$225,000.00
4
$225,000.00
$13,500.00
$225,000.00
$135,000.00
$900,000.00
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