Lupe and Rodrigo, Father and Son, Each Own 50% of the Stock

question 134

Multiple Choice

Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000) . During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

• A)Three years after the redemption, Lupe receives shares of stock in Heron as a gift from Rodrigo.
• B)Lupe received a $250,000 note receivable from Heron in the stock redemption.
• C)Lupe loaned Heron Corporation $50,000 two years following the redemption.
• D)Rodrigo continued to serve on Heron Corporation's board of directors for five years following the redemption.
• E)More than one of the above is correct.

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Definitions:

Average Fixed Costs

The fixed expenses of a business divided by the number of units produced, demonstrating how those costs dilute with increased production.

Implicit Costs

The opportunity costs of using resources owned by the firm for its own production instead of earning income from these resources elsewhere.

Explicit Costs

Direct, out-of-pocket payments made for operations or production, such as wages, rent, and materials.

Average Fixed Cost

The constant expenses associated with production (expenses unaffected by output levels) divided by the volume of production.