Dipper Corporation Is Acquiring Bulbul Corporation by Exchanging 220,000 Shares

question 62

Essay

Dipper Corporation is acquiring Bulbul Corporation by exchanging 220,000 shares of Dipper stock and $80,000 cash for all of Bulbul's assets (valued at $500,000), liabilities ($200,000), and accumulated earnings and profits ($120,000). Betty purchased 40% of Bulbul five years ago for $60,000, and Keith purchased the remaining 60% for $90,000.
What is the amount of the gain or loss (if any) that Betty and Keith recognize, assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?

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Definitions:

Risk-Return Tradeoff

The principle that potential return on investment increases with an increase in risk.

Average Return

The mean amount of profit or loss generated by an investment over a specific period.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how much the values in a data set differ from the mean.

Diversification

An investment strategy aimed at reducing risk by allocating investments among various financial instruments, industries, or other categories.