Dawn, a Sole Proprietor, Was Engaged in a Service Business

question 57

Multiple Choice

Dawn, a sole proprietor, was engaged in a service business and reported her income on a cash basis. Later, she incorporates her business and transfers the assets of the business to the corporation in return for all the stock in the corporation plus the corporation's assumption of the liabilities of her proprietorship. All the receivables and the unpaid trade payables are transferred to the newly formed corporation. The assets of the proprietorship had a basis of $105,000 and fair market value of $300,000. The trade accounts payable totaled $25,000. There was a note payable to the bank in the amount of $95,000 that the corporation assumes. The note was issued for the purchase of computers and other business equipment.

• A) Dawn has a gain on the transfer of $15,000.
• B) The basis of the assets to the corporation is $300,000.
• C) Dawn has a basis of $10,000 in the stock she receives.
• D) Dawn has a zero basis in the stock she receives.
• E) None of the above.

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Definitions:

Common Resources

Natural or man-made resources that are not owned by anyone, are available for use by more than one person, and can be depleted.

Public Good

A product that one individual can consume without reducing its availability to another individual and from which no one is excluded.

Lighthouse

A tall structure with a powerful light at the top, located near or on the shore, providing navigation guidance to maritime pilots at sea or on inland waterways.

Willingness To Pay

The maximum amount that a buyer will pay for a good.