Penguin Corporation Purchased Bonds (Basis of $190,000) of Its 100

question 42

Multiple Choice

Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?

• A) Neither Finch nor Penguin recognize gain (or loss).
• B) Finch recognizes no gain and Penguin recognizes a gain of $10,000.
• C) Finch recognizes a gain of $40,000 and Penguin recognizes no gain.
• D) Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000.
• E) None of the above.

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Definitions:

Indirect Costs

Expenses not directly tied to a specific product or service, such as overheads, that are necessary for running a business.

Variable Costs

Costs that change in proportion to the level of production or sales activity, such as raw materials and direct labor.

Manufacturing Overhead

All indirect costs associated with the production of goods, such as utilities, maintenance, and manager salaries.

Committed Fixed Costs

Investments in facilities, equipment, and basic organizational structure that can’t be significantly reduced even for short periods of time without making fundamental changes.