Adam Transfers Cash of $300,000 and Land Worth $200,000 to Camel

question 83

Multiple Choice

Adam transfers cash of $300,000 and land worth $200,000 to Camel Corporation for 100% of the stock in Camel. In the first year of operation, Camel has net taxable income of $70,000. If Camel distributes $50,000 to Adam:

• A) Adam has taxable income of $50,000.
• B) Camel Corporation has a tax deduction of $50,000.
• C) Adam has no taxable income from the distribution.
• D) Camel Corporation reduces its basis in the land to $150,000.
• E) None of the above.

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Definitions:

Profit Margin

Profit margin is a financial metric showing the percentage of revenue that remains as profit after all operating expenses are deducted from sales.

Investment Turnover

A ratio that measures the efficiency of a company’s use of its assets in generating sales or revenue; the ratio of net sales to average total assets.

Transfer Prices

Prices charged for the selling of goods and services between subsidiaries or divisions within the same company.

Variable Cost

Expenses that change in proportion to the level of production or business activity.