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C:2-1 What entities or business forms are available for a new business? Explain the advantages and disadvantages of each.

C:2-2 Alice and Bill plan to go into business together.
They anticipate losses in the first two or three
years, which they would like to use to offset
income from other sources. They also are concerned
about exposing their personal assets to
business liabilities. Advise Alice and Bill as to
what business form would best meet their needs.


C:2-21 What are the advantages and disadvantages of
using debt in a firm’s capital structure?

C:2-31 Transfer of Property and Services to a Controlled Corporation. In 2010, Ed, Fran, and
George form Jet Corporation. Ed contributes land having a $35,000 FMV purchased as
an investment in 2006 for $15,000 in exchange for 35 shares of Jet stock. Fran contributes
machinery (Sec. 1231 property) purchased in 2006 and used in her business in
exchange for 35 shares of Jet stock. Immediately before the exchange, the machinery had
a $45,000 adjusted basis and a $35,000 FMV. George contributes services worth $30,000
in exchange for 30 shares of Jet stock.
a. What is the amount of Ed’s recognized gain or loss?
b. What is Ed’s basis in his Jet shares? When does his holding period begin?
c. What is the amount of Fran’s recognized gain or loss?
d. What is Fran’s basis in her Jet shares? When does her holding period begin?
e. How much income, if any, does George recognize?
f. What is George’s basis in his Jet shares? When does his holding period begin?
g. What is Jet’s basis in the land and the machinery? When does its holding period begin?
How does Jet treat the amount paid to George for his services?
h. How would your answers to Parts a through g change if George instead contributed
$5,000 in cash and services worth $25,000 for his 30 shares of Jet stock?

C:2-33 Control Requirement. In which of the following exchanges is the Sec. 351 control
requirement met? If the transaction does not meet the Sec. 351 requirements, suggest
ways in which the transaction can be structured so as to meet these requirements.
a. Fred exchanges property worth $50,000 and services worth $50,000 for 100 shares of
New Corporation stock. Greta exchanges $100,000 cash for the remaining 100 shares
of New stock.
b. Maureen exchanges property worth $2,000 and services worth $48,000 for 100 shares
of Gemini Corporation stock. Norman exchanges property worth $50,000 for the
remaining 100 shares of Gemini stock.

C:2-36
Control Requirement. In which of the following exchanges is the Sec. 351 control
requirement met? If the transaction does not meet the Sec. 351 requirements, suggest
ways in which the transaction can be structured so as to meet these requirements.
a. Fred exchanges property worth $50,000 and services worth $50,000 for 100 shares of
New Corporation stock. Greta exchanges $100,000 cash for the remaining 100 shares
of New stock.
b. Maureen exchanges property worth $2,000 and services worth $48,000 for 100 shares
of Gemini Corporation stock. Norman exchanges property worth $50,000 for the
remaining 100 shares of Gemini stock.

C:2-44

D Transfer of Business Properties. Jerry transfers property having a $32,000
adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all of
Emerald’s stock worth $15,000 and Emerald’s assumption of a $35,000 mortgage on
the property.
a. What is the amount of Jerry’s recognized gain or loss?
b. What is Jerry’s basis in the Emerald stock?
c. What is Emerald’s basis in the property?
d. How would your answers to Parts a through c change if the mortgage assumed by Emerald were $15,000 and the Emerald stock were worth $35,000?
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