Shawn,a Sole Proprietor,is Engaged in a Service Business and Uses

question 4

Essay

Shawn,a sole proprietor,is engaged in a service business and uses the cash basis of accounting.In the current year,Shawn incorporates his business by forming Aqua Corporation.In exchange for all of its stock,Aqua receives: assets (basis of $380,000 and fair market value of $1.8 million),trade accounts payable of $125,000,and loan due to a bank of $375,000.The proceeds from the bank loan were used by Shawn to provide operating funds for the business.Aqua Corporation assumes all of the liabilities transferred to it.
a.Does Shawn recognize any gain on the incorporation? Explain.
b.What basis does Shawn have in the Aqua stock?
c.What basis does Aqua Corporation have in the assets it receives?

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Definitions:

Short-term Memory

A memory system that temporarily retains information for a brief period, usually up to 30 seconds, before it is stored permanently or forgotten.

Capacity

The ability or power to do, experience, or understand something, often used in the context of mental or physical capabilities.

Cocktail Party Effect

The ability to focus one's auditory attention on a particular stimulus while filtering out a range of other stimuli, much like being able to focus on a single conversation in a noisy room.

Selective Memory

The phenomenon of remembering certain information while forgetting others, often influenced by emotional factors.