Business_taxation_Solutions_Ch8

Business_taxation_Solutions_Ch8 - Chapter 8 Assignment 3....

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Chapter 8 Assignment 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. $100,000 ($15,000 cash + $85,000 relief of debt) b. KNB’s realized gain on sale is $60,000 ($100,000 amount realized – $40,000 adjusted basis), and the tax cost of the transaction is $20,400 ($60,000 gain × 34%). Therefore, KNB’s after-tax cash flow is negative: $15,000 cash received – $20,400 tax cost = $(5,400). 7. a. Amount realized on sale: Cash $75,000 Purchaser’s note 675,000 $750,000 Adjusted basis (535,000 ) Gain realized on sale $215,000 b. $215,000 gain recognized. TPW’s tax basis in the note at the end of year equals the note’s $641,250 face value ($675,000 original face value – $33,750 August principal payment). c. $215,000 gain realized ÷ $750,000 contract price = 28.67% gross profit percentage. Cash received in year of sale: Cash at closing $75,000 August principal payment 33,750 $108,750 .2867 Gain recognized $31,179 Face value of note at end of year $641,250 Deferred gain: Realized gain $215,000 Recognized gain (31,179 ) (183,821 ) TPW’s tax basis in note $457,429 8. a. Book gain $215,000 Tax gain (31,179 ) Book/tax difference $183,821 b. The excess of book gain over tax gain is a favorable difference. c. $183,821 × 35% = $64,338 deferred tax liability 9. a. $67,500 principal payment × 28.67% = $19,352 gain recognized b. Face value of note at end of year: $641,250 – $67,500 payment $573,750 Deferred gain:
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Realized gain $215,000 Recognized gain: $31,179 + $19,352 (50,531 ) (164,469 ) TPW’s tax basis in note
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Business_taxation_Solutions_Ch8 - Chapter 8 Assignment 3....

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