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

question 87

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.

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Definitions:

Profits

Profits represent the financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity.

Penalty

A penalty applied for violating a regulation, agreement, or statute.

Financial Statements

Financial statements are formal records of the financial activities and position of a business, person, or other entity, providing an overview of a financial situation over a specified period.

Independent Public Accountant

A licensed professional who performs audits and provides financial analysis and advice without being affiliated with the audited entity.