In a Proportionate Liquidating Distribution, Sara Receives a Distribution of $40,000

question 224

Multiple Choice

In a proportionate liquidating distribution, Sara receives a distribution of $40,000 cash, accounts receivable (basis of $0, fair market value of $30,000) , and inventory (basis of $50,000, fair market value of $60,000) . Her basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sara's basis in the accounts receivable and inventory, and how much gain or loss does she recognize?

• A) $0 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.
• B) $0 basis in accounts receivable; $80,000 basis in inventory; $0 gain or loss.
• C) $40,000 basis in accounts receivable; $40,000 basis in inventory; $0 gain or loss.
• D) $30,000 basis in accounts receivable; $50,000 basis in inventory; $30,000 loss.
• E) $30,000 basis in accounts receivable; $60,000 basis in inventory; $10,000 gain.

---

Definitions:

Direct Labor Cost

The total cost of wages paid to labor directly involved in the production of goods or services.

Manufacturing Overhead Cost

Expenses related to manufacturing that are not directly tied to a specific product, such as factory rent and utilities.

Selling Expense

Costs incurred to secure customer orders and deliver the finished product to the customer, including advertising and sales staff salaries.

Product Costs

Costs that are incurred to acquire or manufacture a product, including direct materials, direct labor, and manufacturing overhead.