Erik is the sole owner of a small business that he started 20 years ago. Although he is not yet ready to retire, he is beginning to wonder about what would happen to the business should he die or decide to retire. Erik has a son who has graduated from college and worked at the firm for a few years. His son seems to enjoy the business and have a natural aptitude for the work. Erik is also concerned about maintaining a significant income from the business and, if possible, freezing the value of the business for estate tax purposes. Erik has already used his available applicable credit amount. Which one of the following is the most appropriate form of business transfer technique for Erik to use to achieve his objectives? A) Selling the business to the son on an installment sale basis, with the payments secured by the business assets B) A preferred stock recapitalization in which Erik retains stock that pays a noncumulative dividend and that has a fixed liquidation value, with annual exclusion gifts of nonvoting stock being made to his son C) A cross-purchase buy-sell agreement with his son that is funded with life insurance, with the purchase price being equal to the business's value at the time of sale or death D) A preferred stock recapitalization in which Erik retains stock that pays a fixed cumulative dividend and that has a fixed liquidation value and voting rights, with annual exclusion gifts of nonvoting common stock being made to his son
Erik is the sole owner of a small business that he started 20 years ago. Although he is not yet ready to retire, he is beginning to wonder about what would happen to the business should he die or decide to retire. Erik has a son who has graduated from college and worked at the firm for a few years. His son seems to enjoy the business and have a natural aptitude for the work. Erik is also concerned about maintaining a significant income from the business and, if possible, freezing the value of the business for estate tax purposes. Erik has already used his available applicable credit amount. Which one of the following is the most appropriate form of business transfer technique for Erik to use to achieve his objectives? A) Selling the business to the son on an installment sale basis, with the payments secured by the business assets B) A preferred stock recapitalization in which Erik retains stock that pays a noncumulative dividend and that has a fixed liquidation value, with annual exclusion gifts of nonvoting stock being made to his son C) A cross-purchase buy-sell agreement with his son that is funded with life insurance, with the purchase price being equal to the business's value at the time of sale or death D) A preferred stock recapitalization in which Erik retains stock that pays a fixed cumulative dividend and that has a fixed liquidation value and voting rights, with annual exclusion gifts of nonvoting common stock being made to his son
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Erik is the sole owner of a small business that he started 20 years ago. Although he is not yet ready to retire, he is beginning to wonder about what would happen to the business should he die or decide to retire. Erik has a son who has graduated from college and worked at the firm for a few years. His son seems to enjoy the business and have a natural aptitude for the work. Erik is also concerned about maintaining a significant income from the business and, if possible, freezing the value of the business for estate tax purposes. Erik has already used his available applicable credit amount.
Which one of the following is the most appropriate form of business transfer technique for Erik to use to achieve his objectives?
A)
Selling the business to the son on an installment sale basis, with the payments secured by the business assets
B)
A preferred stock recapitalization in which Erik retains stock that pays a noncumulative dividend and that has a fixed liquidation value, with annual exclusion gifts of nonvoting stock being made to his son
C)
A cross-purchase buy-sell agreement with his son that is funded with life insurance, with the purchase price being equal to the business's value at the time of sale or death
D)
A preferred stock recapitalization in which Erik retains stock that pays a fixed cumulative dividend and that has a fixed liquidation value and voting rights, with annual exclusion gifts of nonvoting common stock being made to his son
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education