Sean, a Sole Proprietor, Is Engaged in a Service Business

question 24

Essay

Sean, a sole proprietor, is engaged in a service business and uses the cash basis of accounting. In the current year, Sean incorporates his business by forming Aqua Corporation. In exchange for all of its stock, Aqua receives: assets (basis of $400,000 and fair market value of $2 million), trade accounts payable of $110,000, and loan of $390,000 due to a bank. The proceeds from the bank loan were used by Sean to provide operating funds for the business. Aqua Corporation assumes all of the liabilities transferred to it.

a. Does Sean recognize any gain on the incorporation? Explain.
b. What basis does Sean have in the Aqua stock?
c. What basis does Aqua Corporation have in the assets it receives?

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Definitions:

Theory

A system of ideas intended to explain something, based on general principles independent of the thing to be explained.

Nutrition Knowledge

Refers to the understanding and awareness of dietary nutrients, their sources, and their effects on the human body.

Food Behaviors

Habits or practices related to how individuals select, consume, and utilize food, which can be influenced by cultural, social, and personal factors.

Quality Diets

Diets that are high in essential nutrients, low in harmful elements, and contribute to overall well-being and health.