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# Business_taxation_Solutions_Ch8 - Chapter 8 Assignment 3 a...

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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 a...

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