In a Proportionate Liquidating Distribution, Sara Receives a Distribution of $40,000

question 27

Multiple Choice

In a proportionate liquidating distribution, Sara receives a distribution of $40,000 cash, accounts receivable (basis of $0, fair market value of $30,000) , and inventory (basis of $50,000, fair market value of $60,000) . Sara's basis in the entity immediately before the distribution was $120,000. As a result of the distribution, what is Sara's basis in the accounts receivable and inventory, and how much gain or loss does she recognize?

• A) $0 basis in accounts receivable? $50,000 basis in inventory? $30,000 loss.
• B) $0 basis in accounts receivable? $80,000 basis in inventory? $0 gain or loss.
• C) $40,000 basis in accounts receivable? $40,000 basis in inventory? $0 gain or loss.
• D) $30,000 basis in accounts receivable? $50,000 basis in inventory? $30,000 loss.
• E) $30,000 basis in accounts receivable? $60,000 basis in inventory? $10,000 gain.

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Definitions:

Warranty Expense

Costs that a company expects to incur under its product warranty promises, recognized as a liability at the time of sale.

Warranty Repairs

Services provided to fix or replace defective goods within a specified period as promised by a warranty agreement.

Income Statement

A document detailing a business's income, expenditures, and net earnings or losses for a distinct timeframe.

Sales Units

The quantity of product units sold by a company within a specific period.