Question

Lucia transferred equipment (adjusted basis of $100,000 and fair market value of $500,000) to Gamma Corporation. In return, Lucia received 80% of Gamma Corporation's stock (worth $320,000) and an automobile (fair market value of $60,000). In addition, there is an outstanding mortgage of $120,000, held for 5 years, on the building that Gamma Corporation assumed. With respect to this trans­action:

Lucia's recognized gain is $80,000.

Gamma Corporation's basis in the building is $100,000.

Lucia's recognized gain is $60,000.

Lucia has no recognized gain.

None of the above

Answer 1

There are two answers based on an assumption.

d) Lucia has no recognized gain (Assuming: In case the books showed balance of $500,000 against the equipment).i.e the fair value of the equipment is already recorded as a gain.

e) None of the above, Lucia would have recognized in the books a gain of $400,000 (Assuming: In case the books showed balance of $100,000 against the equipment).i.e by recognizing the other items fair value and reversing the mortgage, Lucia would have made a gain of $400,000.