Buddy Owns 100 of the Outstanding Shares of Binder Corporation

question 46

Multiple Choice

Buddy owns 100 of the outstanding shares of Binder Corporation stock. Buddy's basis in his Binder Corporation stock is $100,000. Binder Corporation is merged with Clipper Corporation in a tax-free reorganization. Buddy receives 50 shares of Clipper stock worth $150,000 and $150,000 cash. The remaining 100 shares of Binder stock were owned by Bruce who received the same consideration for his Binder stock. Binder and Clipper have E&P balances of $250,000 and $500,000, respectively. Buddy and Bruce each own 25% of Clipper Corporation's 200 shares of stock after the reorganization. Which of the following is correct?

• A)Buddy recognizes $200,000 as dividend income.
• B)Buddy recognizes $200,000 as a capital gain.
• C)Buddy recognizes $150,000 as dividend income.
• D)Buddy recognizes $150,000 as a capital gain.

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Definitions:

Cost System

An accounting framework used to record, track, and analyze the costs associated with a company's operations, helping in budgeting and financial decision-making.

Processing Department

A processing department is a division within a manufacturing facility where a specific stage of production is carried out, essential in process costing systems.

Process Costing

A costing method used when nearly identical products are produced through continuous processes, allocating costs based on process departments.

Journal Entries

The records of financial transactions in the double-entry bookkeeping system, where each transaction is noted in two accounts (debit and credit).