Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company's tax accounting balance sheet. The relevant information is summarized as follows: Cash Receivables Building Land Total FMV S 6,000 9,000 114,000 248,000 S 377,000 S Payables S 11,000 Mortgage 134,000 Total 145,000 Adjusted Basis Appreciation $ 6,000 9,000 57,000 78,000 $ 150,000 $ 11,000 134,000 $ 145,000 57,000 170,000 $ 227,000 *The mortgage is attached to the building and land. Ernesto was asking for $574,000 for the company. His tax basis in the BLI stock was $190,000. Included in the sale price was an unrecognized customer list valued at $190,000. The unallocated portion of the purchase price ($152,000) will be recorded as goodwill. Assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $574,000. a. What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent? (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.) b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian? (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)
Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company's tax accounting balance sheet. The relevant information is summarized as follows: Cash Receivables Building Land Total FMV S 6,000 9,000 114,000 248,000 S 377,000 S Payables S 11,000 Mortgage 134,000 Total 145,000 Adjusted Basis Appreciation $ 6,000 9,000 57,000 78,000 $ 150,000 $ 11,000 134,000 $ 145,000 57,000 170,000 $ 227,000 *The mortgage is attached to the building and land. Ernesto was asking for $574,000 for the company. His tax basis in the BLI stock was $190,000. Included in the sale price was an unrecognized customer list valued at $190,000. The unallocated portion of the purchase price ($152,000) will be recorded as goodwill. Assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $574,000. a. What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent? (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.) b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian? (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Inc. (BLI). As part of their discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company's tax accounting balance sheet. The relevant
information is summarized as follows:
Cash
Receivables
Building
Land
Total
FMV
S
S
6,000
9,000
S
114,000
248,000
377,000
Payables S 11,000
Mortgage*
Total
134,000
145,000
Adjusted
Basis
Appreciation
$ 6,000
9,000
57,000
78,000
$ 150,000
$ 11,000
134,000
$ 145,000
57,000
170,000
$ 227,000
*The mortgage is attached to the building and land.
Ernesto was asking for $574,000 for the company. His tax basis in the BLI stock was $190,000. Included in the sale price was an unrecognized customer list valued at $190,000. The unallocated portion of the purchase price ($152,000) will be recorded as goodwill.
Assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $574,000.
a. What amount of gain or loss does BLI recognize if the transaction is structured as a stock sale to Amy and Brian? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent? (Leave no answer blank. Enter zero if
applicable. Negative amounts should be Indicated by a minus sign.)
b. What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian? (Leave no answer blank. Enter zero if applicable. Negative amounts should be Indicated by a minus sign.)
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