Perch Corporation Has Made Paint and Paint Brushes for the Past

question 44

Multiple Choice

Perch Corporation has made paint and paint brushes for the past ten years.Perch Corporation is owned equally by Arnold,an individual,and Acorn Corporation.Perch Corporation has $100,000 of accumulated and current E&P.Both Arnold and Acorn Corporation have a basis in their stock of $10,000.Perch Corporation discontinues the paint brush operation and distributes assets worth $10,000 each to Arnold and Acorn Corporation in redemption of 20% of their stock.Due to the distribution,Arnold and Acorn Corporation must report:

• A) \[\begin{array} { | l | l | }
• \hline\text { Arnold } & \text { Acorn Corporation } \\
• \hline \$ 8,000 \text { capital gain } & \$ 8,000 \text { capital gain } \\
• \hline
• \end{array}\]
• B) \[\begin{array} { | l | l | }
• \hline\text { Arnold } & \text { Acorn Corporation } \\
• \hline 88,000 \text { capital gain } & \$ 10,000 \text { dividend } \\
• \hline
• \end{array}\]
• C) \[\begin{array} { | l | l | }
• \hline\text { Arnold } & \text { Acorn Corporation } \\
• \hline \$ 10,000 \text { dividend } & \$ 8,000 \text { capital gain } \\
• \hline
• \end{array}\]
• D) \[\begin{array} { | l | l | }
• \hline \text { Arnold } & \text { Acorn Corporation } \\
• \hline 10,000 \text { dividend } & \$ 10,000 \text { dividend } \\
• \hline
• \end{array}\]

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Definitions:

Fair Value

An estimation of the price at which an asset or liability would be willingly exchanged between market participants at an arm's length transaction.

Consolidated Balance Sheet

A financial report that merges the assets, liabilities, and equity of a parent company with its subsidiaries, depicting them as one unified entity.

Identifiable Net Assets

Assets of an acquired company that can be clearly identified and valued at the time of acquisition.

Consolidated Balance Sheet

A financial statement showing the aggregated financial position of a parent company and its subsidiaries, providing a complete look at the total assets and liabilities.