4-50 - shareholders have 3 equal portions of the company....

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ACCT 467 Kristen Jack Chapter 4 – Problem 50 2/7/2012 Tax Basis of Assets = $50,000 Fair Market Value = $600,000 Frank Loan = $150,000 (8% * 150,000 = 12,000) Cora Loan = $150,000 Interest = 8% per annum Mitch Lease Equipment Rental = $12,000 yearly The rent that is paid to Mitch is equal to the amount of interest on each loan. The company has preserved the formalities of the debt (realistic interest rates). The pro rata holding of debt is avoided in this case because the
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Unformatted text preview: shareholders have 3 equal portions of the company. That is, Frank has 1/3 of the debt, Cora another 1/3, and Mitch another 1/3. The debt doesnt need to be converted to equity. As for the debt-equity ratio, it can be defended by stressing the fair market value (600k market value of assets, 300k liabilities) of the assets rather than their tax basis (50k tax basis of assets, 300k of liabilities) to the corporation....
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This note was uploaded on 02/22/2012 for the course ACCT 467 taught by Professor Ruhupatty during the Spring '12 term at Andrews Univeristy.

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