Wade and Paul Form Swan Corporation with the Following Investments

question 1

Multiple Choice

Wade and Paul form Swan Corporation with the following investments. Wade transfers machinery (basis of $40,000 and fair market value of $100,000) , while Paul transfers land (basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000) in organizing the corporation. Each is issued 25 shares in Swan Corporation. With respect to the transfers:

• A) Wade has no recognized gain? Paul recognizes income/gain of $80,000.
• B) Neither Wade nor Paul has recognized gain or income on the transfers.
• C) Swan Corporation has a basis of $30,000 in the land transferred by Paul.
• D) Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation.
• E) None of the above.

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Definitions:

Equity Method

An accounting technique used to record the investments made in other companies, reflecting the investor's proportional share of the investee's net income or loss.

Undervalued Inventory

Undervalued inventory occurs when the recorded cost of inventory is less than its current market value, potentially misstating a company's financial position.

Carrying Value

The book value of an asset or liability on a company's balance sheet, calculated as the original cost minus accumulated depreciation or amortization.

Fair Value

The amount one would obtain from the sale of an asset or the cost incurred to settle a liability in a smooth transaction involving market players on the date of valuation.