Wade and Paul Form Swan Corporation with the Following Investments

question 1

Multiple Choice

Wade and Paul form Swan Corporation with the following investments. Wade transfers machinery (basis of $40,000 and fair market value of $100,000) , while Paul transfers land (basis of $20,000 and fair market value of $90,000) and services rendered (worth $10,000) in organizing the corporation. Each is issued 25 shares in Swan Corporation. With respect to the transfers:

• A) Wade has no recognized gain? Paul recognizes income/gain of $80,000.
• B) Neither Wade nor Paul has recognized gain or income on the transfers.
• C) Swan Corporation has a basis of $30,000 in the land transferred by Paul.
• D) Paul has a basis of $30,000 in the 25 shares he acquires in Swan Corporation.
• E) None of the above.

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Definitions:

Straight-Line Method

A method of calculating depreciation of an asset which assumes the asset will lose an equal amount of value each year over its useful life.

Salvage Value

The estimated residual value of an asset at the end of its useful life, reflecting the amount it could be sold for or its disposal value.

Useful Life

The expected duration of time over which an asset is anticipated to be economically usable by one or more users.

Incremental Fixed Overhead

The fixed costs that will change as a direct result of a decision made by a company.