Acqusition of Klump - Acqusition of Klump Lighting Company Phase 4 Individual Project[Type the author name[Pick the date 0 in cash along with

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Acqusition of Klump Lighting Company Phase 4 Individual Project [Type the author name] [Pick the date]
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0 in cash along with $1,200,000 in common stock in exchange for Klumps' assets and liabilities. Klumps’ assets being transferred to BLC has a fair market value (FMV) of $1,800,000 and an adjusted basis of $1,000,000. Klumps’ liabilities that are being transferred total $225,000. Given this information the type of merger needs to be discussed along with the tax implications of this type of merger. Merger Type This is a type A reorganization that qualifies as a statutory merger. In this type of merger Klump shareholders would exchange their stock for BLC’s stock and up to 50% boot. Boot is considered to be any consideration that is being exchanged other than stock. The fact that BLC is exchanging its stock and boot is the very reason that this transaction would be considered Type reorganization. As we previously discussed a few weeks ago when we held a discussion on acquisitions and reorganizations, at least 50% of the total consideration used in the transactions must be BLC’s stock. BLC has the option to use either nonvoting or voting stock to meet the continuity of interest test. BLC will also have the choice to either use common or preferred stock. The primary benefit to this type of reorganization is that it allows BLC to purchase Klump while partially paying in cash while providing stock which qualifies as a tax- deferred consideration to Klump’s shareholders. In our case the $900,000 in cash would be the boot. The boot of $900,000 would be immediately taxable to Klump’s shareholders while the stock exchange will remain tax deferred. Any losses that may occur are not recognized only gains are realized and recognized. The stock that is being exchanged may be either voting or nonvoting common or qualified preferred shares. Klump would then be liquidated and all of Klump’s assets and liabilities would then become property of BLC.
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This note was uploaded on 06/01/2010 for the course ACCT 618 taught by Professor Franklimmitchum during the Spring '10 term at Colorado Technical University.

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Acqusition of Klump - Acqusition of Klump Lighting Company Phase 4 Individual Project[Type the author name[Pick the date 0 in cash along with

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