ACC 4302 Exam 2 Fall 2020 Answers 1 (Revised 2023) 100% Correct Answers.

ACC 4302 Exam 2 Fall 2020 Answers 1 (Revised 2023) 100% Correct Answers. MC 1. Ula purchased stock in Purple, Inc., 6 years ago for $150,000. Purple has assets with a value of $225,000 ($175,000 basis) and liabilities of $60,000. Purple transfers $200,000 of assets and all of its liabilities to White Corporation in exchange for White common stock. Purple distributes the White stock and its $25,000 remaining asset (cash) to Ula in exchange for all of her Purple stock. Purple then liquidates. How is this transaction treated for tax purposes? a. Ula recognizes a $15,000 gain on the exchange. b. Ula recognizes a $25,000 gain on the exchange. c. Ula recognizes a $25,000 gain and Purple recognizes a $25,000 gain on the exchange. d. Purple recognizes a $50,000 gain on the exchange. ANSWER: a RATIONALE: The White stock received by Ula is worth $140,000 ($225,000 FMV – $25,000 cash retained – $60,000 liabilities). Ula reports a realized gain of $15,000 ($140,000 stock received + $25,000 cash – $150,000 stock basis). The gain is fully recognized since the realized gain is less than the boot received. 2. Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return? a. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000. b. Wanda recognizes a loss of $100,000. Her Jupiter stock basis is $800,000. c. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000. d. Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million. e. None of the above. ANSWER: e RATIONALE: Wanda has a realized loss of $200,000; however, losses are not recognized in reorganizations. Her basis in her Jupiter stock will be $800,000 ($600,000 value of stock received + $200,000 postponed loss OR $900,000 – $100,000 cash received). Page 1 of 8 This study source was downloaded by from CourseH on :25:46 GMT -05:00 3. Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $500,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 700 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a: a. $140,000 dividend. b. $260,000 dividend. c. $140,000 capital gain. d. $260,000 capital gain. e. None of the above. ANSWER: e RATIONALE: The transaction is treated as a return of a portion of her investment. She is treated as having sold 700 of her shares in Blue {basis of $175,000 (700 shares/2,000 shares x $500,000)} for $260,000. Therefore, Eleanor’s capital gain from the sale or exchange is $85,000 ($260,000 – $175,000). 4. Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current year. In addition, Elk has a $27,000 long-term capital gain and a $17,000 short-term capital loss. Elk’s taxable income is: a. $63,000. b. $83,000. c. $80,000. d. $90,000. e. None of the above. ANSWER: d RATIONALE: $370,000 (operating income) – $290,000 (operating expenses) + $27,000 (LTCG) – $17,000 (STCL) = $90,000 taxable income. A corporation cannot deduct a net capital loss in the year incurred 5. Bobcat Corporation redeems all of Zed’s 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $60,000 cash. Zed’s basis in his 20% interest in Bobcat is $100,000 and the stock’s value is $250,000. At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $150,000. How does Zed treat this transaction for tax purposes? a. No gain is recognized by Zed in this reorganization. b. Zed reports a $50,000 recognized dividend. c. Zed reports a $40,000 recognized dividend and a capital gain of $20,000. d. Zed reports a $30,000 recognized dividend and a $30,000 capital gain. e. Not enough information is available to determine proper treatment. ANSWER: d RATIONALE: Zed has a realized gain of $150,000 ($250,000 – $100,000) and a recognized gain of $60,000. His proportionate share of Bobcat Corporation’s accumulated earnings and profits is $40,000 ($150,000 × 20% = $30,000) and the remaining $30,000 gain is capital gain.