c. What amount of gain or loss does Ernesto recognize if the transaction is structured as a Type A merger? d. What is Ernesto’s tax basis in the STS stock he receives in the exchange? 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 oftheir discussions with the sole shareholder of the corporation, Ernesto Young, they examined the company's taxaccounting balance sheet. The relevant information is summarized as follows: (Leave no answer blank. Enter zero ifapplicable. Negative amounts should be indicated by a minus sign.)Adjusted TaxBasis$ 15,00022,000FMVAppreciationCashReceivablesBuilding15,00022,00095,000204,000$ 336,00047,50044,00047,500160,000$ 207,500Land$ 128,500Total$ 24,000113,000$ 24,000PayablesMortgage*113,000$ 137,000* The mortgage is attached to the building and land.$ 137,000TotalErnesto was asking for $432,000 for the company. His tax basis in the BLI stock was $165,000. Included in the sales pricewas an unrecognized customer list valued at $165,000. The unallocated portion of the purchase price ($68,000) will berecorded as goodwill.Rather than purchase BLI directly, Amy and Brian will have their corporation, Spartan Tax Services (STS), acquire thebusiness from Ernesto in a tax-deferred Type A merger. Amy and Brian would like Ernesto to continue to run BLI, which heagreed 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 thetransaction.b. What amount of gain or loss does BLI recognize if the transaction is structured as a Type A merger? What amount of corporate-leveltax does BLI pay as a result of the transaction, assuming a tax rate of 21 percent?Gain or loss recognized92,505Corporate-level tax$92,505

Capital gain refers to the sum value of money gained by an entity while selling an asset in the…

Business

Accounting

iz

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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