Sean, a Sole Proprietor, Is Engaged in a Service Business

question 6

Essay

Sean, a sole proprietor, is engaged in a service business and uses the cash basis of accounting. In the current year, Sean incorporates his business by forming Aqua Corporation. In exchange for all of its stock, Aqua receives: assets (basis of $400,000 and fair market value of $2 million), trade accounts payable of $110,000, and loan due to a bank of $390,000. The proceeds from the bank loan were used by Sean to provide operating funds for the business. Aqua Corporation assumes all of the liabilities transferred to it.
a. Does Sean recognize any gain on the incorporation? Explain.
b. What basis does Sean have in the Aqua stock?
c. What basis does Aqua Corporation have in the assets it receives?

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Definitions:

Gametophytes

Gametophytes are the sexual phase in the life cycle of plants and algae, producing gametes for fertilization.

Mitosis

A type of cell division that results in two daughter cells each having the same number and kind of chromosomes as the parent nucleus, typical of ordinary tissue growth.

Meiosis

A type of cell division that reduces the chromosome number by half, resulting in the production of gametes or spores.

Eudicot Seed

A seed type characteristic of a large grouping of flowering plants, distinguished by having two cotyledons (seed leaves).