8&9.docx

# 8&9.docx - chapter 8 3 a Firm CS must recognize \$38,500...

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chapter 8 3. a. Firm CS must recognize \$38,500 ordinary income on the receipt of the securities as payment for services rendered. CS’s basis in the securities is \$38,500. b. Company P must recognize \$13,500 capital gain on the transfer of the securities (\$38,500 value of consulting services purchased - \$25,000 basis). c. Assuming that Company P can deduct the consulting expense, the fact that the expense was paid with a noncash asset is irrelevant. The amount of the deduction is \$38,500. 5. a. \$ 15,000 + \$ 85,000 = \$ 100,000 b. KNB’s realized gain on sale = \$ 100,000 - \$ 40,000 = \$ 60,000 the tax cost of the transaction = \$ 60,000 * 34% = \$ 20,400 KNB’s after-tax cash flow = \$ 15,000 - \$ 20,400 = \$ (5,400) 7. a. realized on sale = \$ 75,000 + \$ 675,000 = \$ 750,000 realized gain on sale = \$750,000 - \$535,000 = \$215,000 b. TPW’s tax basis in the note at year end = Original face value of note - August principal payment = \$675,000 - \$33,750 = \$641,250 c. gross profit percentage = gain realized / contract price = \$215,000 / \$750,000 = 28.67% Cash received in year of sale = \$75,000 + \$ 33,750 = \$108,750 Gain recognized = \$108,750 * 28.67% = \$31,179 Deferred gain = Realized gain - Recognized gain =\$215,000 - \$31,179 =\$183,821 TPW’s tax basis in note = Face value of note at end of year - Deferred gain = \$641,250 - \$183, 821 =\$457,429 8. a. Difference = Book gain - Tax gain = \$215,000 - \$31,179 = \$183,821 b. The excess of book gain over tax gain is a favorable difference.

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• Fall '16
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