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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