Norman Transfers Machinery That Has a $45,000 Basis and a $105,000

question 8

Essay

Norman transfers machinery that has a $45,000 basis and a $105,000 FMV and $30,000 in money to Elnor Corpor exchange for 50 shares of Elnor stock. The machinery, used in Norman's business, originally cost him $150,000 an subject to an $84,000 liability which Elnor Corporation assumes. Kate exchanges $51,000 cash for the remaining 5 of Elnor stock.
a) What is the amount and character of Norman's recognized gain or loss?
b) What is his basis in the Elnor stock?
c) What is Elnor's basis in the machinery?
d) What is the amount and character of Kate's recognized gain or loss?
e) What is Kate's basis in the Elnor stock?
f) When do Norman and Kate's holding periods for their stock begin?

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Definitions:

Corporations

Are legal entities that are separate and distinct from their owners. They have the ability to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.

Vertical Analysis

A method of financial statement analysis in which each entry is listed as a percentage of another item, typically used for income statements where entries are compared to total sales.

Total Assets

The sum of all resources owned by a company, valued according to accounting principles, including both current and non-current assets.

Current Position Analysis

A financial evaluation that assesses a company's current financial health, focusing on its ability to meet short-term obligations with its current assets.