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? Gain or loss recognized Corporate-level tax $ $ 92,505 92,505
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? Gain or loss recognized Corporate-level tax $ $ 92,505 92,505
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Required information
[The following information applies to the questions displayed below.]
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: (Leave no answer blank. Enter zero if
applicable. Negative amounts should be indicated by a minus sign.)
Cash
Receivables
Building
Land
Total
Payables
Mortgage*
FMV
15,000
22,000
95,000
204,000
$ 336,000
$ 24,000
113,000
$ 137,000
Total
* The mortgage is attached to the building and land.
Gain or loss recognized
Corporate-level tax
Adjusted Tax
Basis
$ 15,000
22,000
47,500
44,000
$ 128,500
$
$
$ 24,000
113,000
$ 137,000
Ernesto was asking for $432,000 for the company. His tax basis in the BLI stock was $165,000. Included in the sales price
was an unrecognized customer list valued at $165,000. The unallocated portion of the purchase price ($68,000) will be
recorded as goodwill.
Appreciation
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
$216,000 plus voting stock in STS worth $216,000. Ernesto will become a 10 percent shareholder in STS after the
transaction.
92,505
92,505
47,500
160,000
$ 207,500
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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb9415a84-b266-463d-bec0-f01f9195f91a%2F5d3dbbc5-74fb-4063-ac74-ea2044912d46%2Fjeh3xi_processed.png&w=3840&q=75)
Transcribed Image Text:!
Required information
[The following information applies to the questions displayed below.]
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: (Leave no answer blank. Enter zero if
applicable. Negative amounts should be indicated by a minus sign.)
Cash
Receivables
Building
Land
Total
Payables
Mortgage*
FMV
15,000
22,000
95,000
204,000
$ 336,000
$ 24,000
113,000
$ 137,000
Total
* The mortgage is attached to the building and land.
Gain or loss recognized
Corporate-level tax
Adjusted Tax
Basis
$ 15,000
22,000
47,500
44,000
$ 128,500
$
$
$ 24,000
113,000
$ 137,000
Ernesto was asking for $432,000 for the company. His tax basis in the BLI stock was $165,000. Included in the sales price
was an unrecognized customer list valued at $165,000. The unallocated portion of the purchase price ($68,000) will be
recorded as goodwill.
Appreciation
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
$216,000 plus voting stock in STS worth $216,000. Ernesto will become a 10 percent shareholder in STS after the
transaction.
92,505
92,505
47,500
160,000
$ 207,500
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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