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. FMV Adjusted Tax Basis Appreciation Cash $ 10,000 $ 10,000 Receivables 15,000 15,000 Building 100,000 50,000 50,000 Land 225,000 75,000 150,000 Total $ 350,000 $ 150,000 $ 200,000 Payables $ 18,000 $ 18,000 Mortgage* 112,000 112,000 Total $ 130,000 $ 130,000 * The mortgage is attached to the building and land. Ernesto was asking for $400,000 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 ($80,000) will be recorded as goodwill. Assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000. Required: 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? What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian? What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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.

	FMV	Adjusted Tax Basis	Appreciation
Cash	$ 10,000	$ 10,000
Receivables	15,000	15,000
Building	100,000	50,000	50,000
Land	225,000	75,000	150,000
Total	$ 350,000	$ 150,000	$ 200,000

Payables	$ 18,000	$ 18,000
Mortgage*	112,000	112,000
Total	$ 130,000	$ 130,000

* The mortgage is attached to the building and land.

Ernesto was asking for $400,000 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 ($80,000) will be recorded as goodwill.

Assume Ernesto agrees to sell his stock in BLI to Amy and Brian for $400,000.

Required:

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?
What amount of gain or loss does Ernesto recognize if the transaction is structured as a stock sale to Amy and Brian?
What are the tax benefits, if any, to Amy and Brian as a result of structuring the acquisition as a stock sale?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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