Four Shareholders Form a New Corporation in Exchange for Stock

question 11

Multiple Choice

Four shareholders form a new corporation in exchange for stock with a fair market value of $1,000 per share.Benjamin transfers investment land (current fair market value of $35,000) that he purchased 10 year ago for $15,000.In exchange, Benjamin receives 30 shares of stock and $5,000 cash.Andrew transfers a machine with a basis of $45,000 and a fair market value of $35,000.Andrew receives 30 shares of stock and $5,000 cash.Emily transfers a rental office building (current fair market value of $45,000) that she purchased 20 years ago for $60,000.Its current basis is $15,000 after recognition of $45,000 in depreciation expense.The corporation assumes the $20,000 balance on the original mortgage and Emily receives 25 shares of stock from the corporation in the exchange.Jackson provided the legal services to organize the corporation (value $5,000) and contributes $10,000 in cash in exchange for 15 shares of stock.How much income or gain does Jackson recognize?

• A)$0
• B)$5,000
• C)$10,000
• D)$15,000

---

Definitions:

Raw Materials Inventory

The total cost of all components and materials stored and awaiting use in the production process, forming a significant part of a manufacturing company's current assets.

Production Needs

The requirements and resources necessary to complete the manufacturing process for goods or services.

Raw Materials Cost

The expense associated with obtaining the basic materials required for production before any processing or manufacturing is done.

Finished Goods Inventory

The inventory of products that have been manufactured and are ready to be sold to customers.