Lemon Corporation Is Having Financial Difficulties

question 7

Multiple Choice

Lemon Corporation is having financial difficulties.Its liabilities now amount to $600,000 and its assets are only valued at $200,000.Further,Lemon has capital loss carryovers of $80,000 and NOL carryovers amounting to $350,000 at the time of its restructuring.Through a bankruptcy proceeding (Type G reorganization) ,Citrus Corporation becomes the successor corporation to Lemon.Which of the following statements is true with regard to the described transaction?

• A)Citrus can utilize $30,000 of Lemon's NOL and none of Lemon's capital loss carryforward.
• B)Citrus recognizes $400,000 of cancellation of debt income. Citrus can utilize all of Lemon's capital loss and NOL carryforwards.
• C)Citrus can utilize $30,000 of Lemon's capital losses and none of Lemon's NOL.
• D)Citrus must reduce its basis in Lemon's assets to zero and reduce the NOL carryforward to $150,000.
• E)None of the above statements are true.

---

Definitions:

Marginal-Cost

The expense associated with producing one additional unit of a good or service, critical for decision-making in business and economic policy.

Economies of Scale

The cost advantage achieved by an increase in production, leading to a reduction in expenses per unit due to more efficient use of resources.

Long-Run Average Cost

The per-unit cost of production in the long term, where all inputs are variable.

Total Output

The total value of goods and services produced by an economy over a specific period of time.