Rob and Yi Form Bluebird Corporation with the Following Investments

question 100

Multiple Choice

Rob and Yi form Bluebird Corporation with the following investments. $\begin{array}{lll}&&\text { Fair Market }\\&\text { Adjusted Basis }&\text { Value }\\ \text { From Rob-Cash}&\$400,000&\$400,000\\ \text { From Yi -Land}&500,000&440,000\\\end{array}$
Each receives 50% of Bluebird's stock. In addition, Yi receives cash of $40,000. One result of these transfers is that Yi has a:

• A) Recognized loss of $60,000.
• B) Recognized loss of $20,000.
• C) Basis of $460,000 in the Bluebird stock assuming Bluebird reduces its basis in the land to $440,000).
• D) Basis of $400,000 in the Bluebird stock assuming Bluebird reduces its basis in the land to $440,000).
• E) None of these.

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Definitions:

Companies

Legal entities formed by individuals, stockholders, or shareholders, with the purpose of engaging in commercial or industrial activities.

Jewelers

Jewelers are professionals or businesses involved in the design, production, and sale of jewelry.

Average cost method

An inventory costing method where all costs of inventory are averaged out to determine the cost of goods sold and the ending inventory value.

Cost of merchandise sold

The entire expense directly tied to the production and sale of products in inventory that were sold during a specific period.