buckwold13e_ReviewSolutions_Ch18 - CHAPTER 18 BUSINESS...

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CHAPTER 18 BUSINESS ACQUISITIONS AND DIVESTITURES― ASSETS VERSUS SHARES Review Questions 1. “The sale of business assets by a vendor corporation normally results in two levels of tax, rather than a single level of tax, as is the case when the shares of the business corporation are sold.” Explain this statement. 2. In general terms, what types of gains or losses may occur for tax purposes when specific business assets are sold? 3. If a business is to be sold on terms that require deferred payments, why may the timing of the related tax cost to the vendor be different if the specific business assets, rather than the shares of the business corporation, are sold? 4. If a group of business assets is sold with specific values attached to each item, what difference, if any, does it make whether the terms of payment (that is, the amount of cash and deferred payments) are expressed separately for each asset sold or as a total for the group of assets sold? 5. When a corporation sells its business by disposing of its business assets, the amount of tax to the corporation resulting from the sale can be determined with relative certainty. Does the same degree of certainty exist with respect to determining the second level of tax when the proceeds of the asset sale are distributed to the shareholder? Explain. 6. The after-tax cash flow from the earnings of the acquired business may be different for the purchasers if they acquire the shares of the vendor corporation, rather than its specific assets. Explain why. 7. Why is it important for the purchaser to establish an accurate value for each individual asset acquired when a group of business assets is being purchased for an agreed- upon total price? 8. “When a purchaser acquires the shares of a vendor corporation, it may be assuming a potential tax liability of the vendor corporation.” What is meant by this statement? To the extent that such a potential liability exists, what impact may this have on the purchase price, and how can it be measured? 9. To what extent, if any, should the vendor to be concerned about the tax status of the purchaser when contemplating the sale of a business? 10. Why is it important for the purchaser of a business to anticipate the post-acquisition organization structure before making the acquisition? 11. When a business can be sold under either an asset sale or a share sale, why is it important that both the vendor and the purchaser attempt to determine the vendor’s tax cost from the sale under a worst-case scenario?
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What is the worst-case scenario when an individual who owns the shares of a business corporation is considering the sale of that business? How is that individual’s tax position affected if the business for sale is held within a corporation that is a subsidiary of a large public corporation? 13.
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This note was uploaded on 07/03/2011 for the course BUS 3120 taught by Professor Weedon during the Spring '10 term at University of Winnipeg.

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buckwold13e_ReviewSolutions_Ch18 - CHAPTER 18 BUSINESS...

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