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:

Stimulus Generalization

A psychological phenomenon where a conditioned response starts occurring in response to stimuli that are similar but not identical to the original conditioned stimulus.

Conditioned Response

A reflexive reaction developed through training in response to a stimulus that is normally neutral.

Learned Response

A behavioral outcome that occurs as a result of experience or conditioning.

Classical Conditioning

A behavioral training method where two stimuli are consistently combined; a reaction, at first elicited by the second stimulus, is later elicited by the sole first stimulus.