Newman Corporation owns 90 shares of SP Corporation. The remaining 10 shares are owned by Kenny (an individual). After several years of operations, Newman decided to liquidate SP Corporation by distributing the assets to Newman and Kenny. The tax basis of Newman's shares is $9,000, and the tax basis of Kenny's shares is $4,000. SP reported the following balance sheet at the date of liquidation: Cash Accounts receivable. Stock investment Land Total assets Common stock-Newman (90%) Common stock-Kenny (10%) Total shareholder equity Required: Adjusted tax basis $ 22,000 9,000 8,200 26,000 $ 65,200 FMV $ 22,000 9,000 20,000 149,000 $ 200,000 $ 180,000 20,000 $ 200,000 a. Compute the gain or loss recognized by SP, Newman, and Kenny on a complete liquidation of the corporation, where SP distributes $20,000 of cash to Kenny and the remaining assets to Newman. b. Compute the gain or loss recognized by SP, Newman, and Kenny on a complete liquidation of the corporation, where SP distributes the stock investment to Kenny and the remaining assets to Newman. Assume that SP's tax rate is zero. c. What form needs to be filed with the liquidation of SP?

Newman Corporation owns 90 shares of SP Corporation. The remaining 10 shares are owned by Kenny (an individual). After several years of operations, Newman decided to liquidate SP Corporation by distributing the assets to Newman and Kenny. The tax basis of Newman's shares is $9,000, and the tax basis of Kenny's shares is $4,000. SP reported the following balance sheet at the date of liquidation: Cash Accounts receivable. Stock investment Land Total assets Common stock-Newman (90%) Common stock-Kenny (10%) Total shareholder equity Required: Adjusted tax basis $ 22,000 9,000 8,200 26,000 $ 65,200 FMV $ 22,000 9,000 20,000 149,000 $ 200,000 $ 180,000 20,000 $ 200,000 a. Compute the gain or loss recognized by SP, Newman, and Kenny on a complete liquidation of the corporation, where SP distributes $20,000 of cash to Kenny and the remaining assets to Newman. b. Compute the gain or loss recognized by SP, Newman, and Kenny on a complete liquidation of the corporation, where SP distributes the stock investment to Kenny and the remaining assets to Newman. Assume that SP's tax rate is zero. c. What form needs to be filed with the liquidation of SP?

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

Newman Corporation owns 90 shares of SP Corporation. The remaining 10 shares are owned by Kenny (an individual). After several
years of operations, Newman decided to liquidate SP Corporation by distributing the assets to Newman and Kenny. The tax basis of
Newman's shares is $9,000, and the tax basis of Kenny's shares is $4,000. SP reported the following balance sheet at the date of
liquidation:
Cash
Accounts receivable
Stock investment
Land
Total assets
Common stock-Newman (90%)
Common stock-Kenny (10%)
Total shareholder equity
Required:
Adjusted tax
basis
$ 22,000
9,000
8,200
26,000
$ 65,200
FMV
$ 22,000
9,000
20,000
149,000
$ 200,000
$ 180,000
20,000
$ 200,000
a. Compute the gain or loss recognized by SP, Newman, and Kenny on a complete liquidation of the corporation, where SP distributes
$20,000 of cash to Kenny and the remaining assets to Newman.
b. Compute the gain or loss recognized by SP, Newman, and Kenny on a complete liquidation of the corporation, where SP distributes
the stock investment to Kenny and the remaining assets to Newman. Assume that SP's tax rate is zero.
c. What form needs to be filed with the liquidation of SP?

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