Sergio and Chris Agree to Combine Their Sole Proprietorships and Form

question 55

Multiple Choice

Sergio and Chris agree to combine their sole proprietorships and form a corporation.Sergio will contribute cash of $20,000 and business property worth $120,000 (adjusted basis of $50,000) for a 25% interest.Chris will contribute cash of $200,000 and business property worth $220,000 (adjusted basis of $200,000) for a 75% interest.Which of the following statements concerning the tax treatment of Sergio and Chris's exchange of assets is/are correct?
L.
Because neither owner owns more than 80% of the stock in the corporation,the transfers do not qualify for tax-free treatment.
II.Based on the wherewithal-to-pay concept,each owner is taxed on the cash they contributed to the corporation.
III.Sergio will recognize a $70,000 gain and Chris will recognize a $20,000 gain.
IV.No gain or loss is recognized on the exchange.

• A)Only statement IV is correct.
• B)Statements I and III are correct.
• C)Only statement II is correct.
• D)Only statement III is correct.
• E)None of the statements are correct.

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Definitions:

U.S.GAAP

Generally Accepted Accounting Principles in the United States, a collection of financial reporting standards utilized in the U.S. for accounting purposes.

IFRS

The International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB), aimed at making global financial reporting more transparent and comparable.

OCI

Other Comprehensive Income, which includes revenues, expenses, gains, and losses that are not included in net income and directly affect shareholders' equity.

Weighted-Average Method

An inventory costing method that calculates the cost of goods sold and ending inventory based on the average cost of all items available for sale during the period.