Mike and Michelle Decided to Liquidate Their Jointly Owned Corporation,Pennsylvania

question 70

Essay

Mike and Michelle decided to liquidate their jointly owned corporation,Pennsylvania Corporation.After liquidating its remaining inventory and paying off its remaining liabilities,Pennsylvania had the following tax accounting balance sheet.
$\begin{array}{rrr}&&&\text { Appreciation }\\&\text { FMV}&\text { Tax Basis}&\text { (Depreciation)}\\\text { Cash}&\$ 200,000 & \$ 200,000 & \\\text { Building} &200,000 & 100,000& 100,000 \\\text { Land}&\underline {100,000}& \underline {150,000 }&\underline { (50,000)} \\\text { Total}&\underline {\$ 500,000 }&\underline { \$ 450,000 }&\underline { \$ 50,000}\\\end{array}$ Under the terms of the agreement,Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania.Mike's tax basis in his Pennsylvania stock is $50,000.Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania.Her tax basis in the Pennsylvania stock is $100,000.
What amount of gain or loss does Michelle recognize in the complete liquidation and what is her tax basis in the building and land after the complete liquidation?

Understand the differences between the cost of debt and the cost of equity and their implications for the WACC.

Comprehend how corporate tax rates influence the after-tax cost of debt and WACC.

Analyze the effects of changes in capital structure on WACC.

Apply the appropriate cost of capital for evaluating capital budgeting projects based on funding sources.

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Definitions:

Collectivism

A cultural value or social outlook that emphasizes the importance of groups and community over individual achievements or desires.

Culture

The shared values, customs, social behaviors, institutions, and intellectual achievements of a particular society or group, shaping its members' worldview and lifestyle.

Cognitive Dissonance Theory

A theory suggesting that individuals experience discomfort and thus are motivated to reduce it by changing their attitudes, beliefs, or actions when they are inconsistent.

Role-Playing Theory

A psychological perspective that suggests individuals perform actions in society based on the roles they are expected to play.