Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Incorporated (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: Note: Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign. Cash Receivables Building Land Total Payables Mortgage Total FMV 12,000 19,000 77,000 165,000 $ 273,000 $ 22,000 87,000 $ 109,000 Adjusted Tax Gain or loss recognized Corporate-level tax Basis Appreciation $ 12,000 19,000 38,500 105,000 $ 174,500 $ 22,000 87,000 $ 109,000 38,500 60,000 $ 98,500 *The mortgage is attached to the building and land. Ernesto was asking for $402,000 for the company. His tax basis in the BLI stock was $100,000. Included in the sales price was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($138,000) will be recorded as goodwill. Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto $201,000 plus voting stock in STS worth $201,000. Ernesto will become a 10 percent shareholder in STS after the transaction. Problem 19-59 Part b (Algo) b. What amount of gain or loss does BLI recognize if the transaction is structured as a Type A merger? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent?
Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Incorporated (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: Note: Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign. Cash Receivables Building Land Total Payables Mortgage Total FMV 12,000 19,000 77,000 165,000 $ 273,000 $ 22,000 87,000 $ 109,000 Adjusted Tax Gain or loss recognized Corporate-level tax Basis Appreciation $ 12,000 19,000 38,500 105,000 $ 174,500 $ 22,000 87,000 $ 109,000 38,500 60,000 $ 98,500 *The mortgage is attached to the building and land. Ernesto was asking for $402,000 for the company. His tax basis in the BLI stock was $100,000. Included in the sales price was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($138,000) will be recorded as goodwill. Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto $201,000 plus voting stock in STS worth $201,000. Ernesto will become a 10 percent shareholder in STS after the transaction. Problem 19-59 Part b (Algo) b. What amount of gain or loss does BLI recognize if the transaction is structured as a Type A merger? What amount of corporate-level tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent?
Chapter13: Choice Of Business Entity—general Tax And Nontax Factors/formation
Section: Chapter Questions
Problem 55P
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Transcribed Image Text:Amy and Brian were investigating the acquisition of a tax accounting business, Bottom Line Incorporated (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:
Note: Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.
Cash
Receivables
Building
Land
Total
Payables
Mortgage
Total
FMV
12,000
19,000
77,000
165,000
$ 273,000
$ 22,000
87,000
$ 109,000
Adjusted Tax
Basin
$ 12,000
19,000
38,500
105,000
$ 174,500
Gain or loss recognized
Corporate-level tax
$ 22,000
87,000
$ 109,000
Appreciation
38,500
60,000
$ 98,500
*The mortgage is attached to the building and land.
Ernesto was asking for $402,000 for the company. His tax basis in the BLI stock was $100,000. Included in the sales price
was an unrecognized customer list valued at $100,000. The unallocated portion of the purchase price ($138,000) will be
recorded as goodwill.
Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire the
business from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which he
agreed to do if he could obtain an equity interest in STS. As part of the agreement, Amy and Brian propose to pay Ernesto
$201,000 plus voting stock in STS worth $201,000. Ernesto will become a 10 percent shareholder in STS after the
transaction.
Problem 19-59 Part b (Algo)
b. What amount of gain or loss does BLI recognize if the transaction is structured as a Type A merger? What amount of corporate-level
tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent?
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