Walter, Who Owns All of the Ajax Corporation Stock, Purchases

question 76

Multiple Choice

Walter, who owns all of the Ajax Corporation stock, purchases a truck from Ajax Corporation in January. The truck cost $12,000 and has a $10,000 adjusted basis. Walter pays the truck's $8,000 FMV. Later in the same year, Walter sells the truck to an unrelated party for $13,000. With respect to these transactions

• A)Ajax Corporation reports a loss of $2,000 and Walter reports a gain of $5,000.
• B)Ajax Corporation reports no loss and Walter reports a gain of $3,000.
• C)Ajax Corporation reports a loss of $4,000 and Walter reports a gain of $5,000.
• D)Ajax Corporation reports no loss and Walter reports a gain of $5,000.

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Definitions:

Conversion Cost

The total expense of converting raw materials into finished goods, including both direct labor and manufacturing overhead.

Manufacturing Overhead

Indirect factory-related costs that are incurred when a product is manufactured, including costs for management, equipment maintenance, and factory utilities.

Direct Labor Cost

This cost includes wages and benefits paid to employees who are directly involved in producing goods or providing services.

Product Costs

Expenses directly associated with the production of goods, including materials, labor, and overhead costs.