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 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 7,000 11,000 75,000 168,000 $ 261,000 $ 14,000 94,000 $ 108,000 Adjusted Tax Basis $ 7,000 11,000 37,500 68,000 $ 123,500 Gain or loss recognized Corporate-level tax $ 14,000 94,000 $ 108,000 Appreciation 37,500 100,000 $ 137,500 * The mortgage is attached to the building and land. Ernesto was asking for $424,000 for the company. His tax basis in the BLI stock was $190,000. Included in the sal price was an unrecognized customer list valued at $190,000. The unallocated portion of the purchase price ($81,000) will be recorded as goodwill. Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire th 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 propo to pay Ernesto $212,000 plus voting stock in STS worth $212,000. Ernesto will become a 10 percent shareholder i STS after the transaction. b. What amount of gain or loss does BLI recognize if the transaction is structured as a Type A merger? What amount of 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 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 7,000 11,000 75,000 168,000 $ 261,000 $ 14,000 94,000 $ 108,000 Adjusted Tax Basis $ 7,000 11,000 37,500 68,000 $ 123,500 Gain or loss recognized Corporate-level tax $ 14,000 94,000 $ 108,000 Appreciation 37,500 100,000 $ 137,500 * The mortgage is attached to the building and land. Ernesto was asking for $424,000 for the company. His tax basis in the BLI stock was $190,000. Included in the sal price was an unrecognized customer list valued at $190,000. The unallocated portion of the purchase price ($81,000) will be recorded as goodwill. Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire th 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 propo to pay Ernesto $212,000 plus voting stock in STS worth $212,000. Ernesto will become a 10 percent shareholder i STS after the transaction. b. What amount of gain or loss does BLI recognize if the transaction is structured as a Type A merger? What amount of tax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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
7,000
11,000
75,000
168,000
$ 261,000
$ 14,000
94,000
$ 108,000
Adjusted Tax
Basis
$7,000
11,000
37,500
68,000
$ 123,500
Gain or loss recognized
Corporate-level tax
$ 14,000
94,000
$ 108,000
Appreciation
37,500
100,000
$ 137,500
* The mortgage is attached to the building and land.
Ernesto was asking for $424,000 for the company. His tax basis in the BLI stock was $190,000. Included in the sales
price was an unrecognized customer list valued at $190,000. The unallocated portion of the purchase price
($81,000) 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 $212,000 plus voting stock in STS worth $212,000. Ernesto will become a 10 percent shareholder in
STS after the transaction.
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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