Question

Problem 18-26 (LO. 1, 3) Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration: Consideration Transferred Number of Shares Issued Basis to Fair Market Transferor Value From Seth- Inventory $30,000 $96,000 305 From Pete- Equipment ($30,000 of depreciation taken by Pete in prior years) 45,000 99,000 303* From Cara- Proprietary process 15,000 90,000 From Jen- Cash 30,000 30,000 10 Seth receives $6,000 in cash in addition to the 30 shares ceives $9,000 in cash in addition to the 30 shares The value of each share of Kingfisher stock is $3,000 As to these transactions, provide the following information: a. Seth recognizes as ordinary gain V . Feedback b. Seth's basis in the Kingfisher Corporation stock is Feedback

Answer 1

Ans: Seth , Pete , Cara and Jen form Kingfisher Corporation

a). Seth will recognize profit of $66,000

Value of share allotted to Seth (3000*30) $90,000

Add:

Consideration received in cash $ 6000

Less:

Value of Inventory $30,000

Profit $66,000

b). Seth Basis's in Kingfisher stock is $90,000

c) Kingfisher basis's in the Inventory is $ 96,000

d) Pete Recognize profit of $ $84,000

Value of share allotted to Pete (3000*30) $90,000

Add:

Consideration received in cash $ 9000

Less:

Value of Equipment $45,000

Less: Depreciation $30,000

$15,000

Profit $84,000

e) Pete Basis's in Kingfisher stock is $90,000

f) Kingfisher basis's in the Inventory is $99,000

g) Cara has profit of $75,000

Value of share allotted to Cara (3000*30) $90,000

Less:

Value of proprietary   $15,000

Profit $75,000

h) Car has basis of $90,000 in Kingfisher corporation

i) Kingfisher corporation has a basis of $ 90,000 in the proprietary process

j) Jen has no profit or loss on transfer

k) Jen has a basis of $30,000 in Kingfisher corporation stock

l) Effect on tax of Seth

1) Sale of Inventory in market at fair value

Cash $96,000

Less:

Basis of Inventory $30,000

Profit $66,000

Marginal rate of Tax 35%

Tax $23,100

2) Exchange Inventory with stock in Kingfisher Corporation with stock and $6,000 in cash and sold stock in  for $90,000 after 5 year

Cash $6,000

Less:

Basis of Inventory ($30,000*6,000/96000) $1,875

Profit $4,125   

Marginal rate of Tax 35%

Tax (1)    $1,444

Computation Present value of Capital gain

Cash $90,000

Less:

Basis of Inventory ($30,000*90,000/96000) $28,125

Profit $61,875   

Capital gain Tax rate 15%

Tax $9,281.25

Present value factor 0.7473

Present value of tax (2) $6,936

Total Tax Payment (1+2) $8,380

Tax cost of option 1 over option 2 is $14,720 ($23,100-$8,380)