Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration: Consideration Transferred From Seth— Inventory $30,000 Basis to Transferor $96,000 Fair Market Value 30 Number of Shares Issued, Seth receives $6,000 in cash in addition to the 30 shares From Pete— Equipment ($30,000 of depreciation taken by Pete in prior years) $45,000 Basis to Transferor $99,000 Fair Market Value 30 Number of Shares Issued, Pete receives $9,000 in cash in addition to the 30 shares. From Cara— Proprietary process $15,000 Basis to Transferor $90,000 Fair Market Value 30 Number of Shares Issued From Jen— Cash $30,000 Basis to Transferor $30,000 Fair Market Value 10 Number of Shares Issued Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information: During discussions relating to the formation of Kingfisher, Seth mentions that he may be interested in either (1) just selling all his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in Kingfisher’s formation as shown above but followed by a sale of his stock five-years later for $90,000. What would be the tax cost of these alternative plans stated in the present value terms? Refer to the table and assume a discount rate of 6%. Assume Seth’s marginal income tax rate is 35% and his capital gains rate is 15%.

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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Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration:

Consideration Transferred

From Seth—
Inventory
$30,000 Basis to Transferor
$96,000 Fair Market Value
30 Number of Shares Issued, Seth receives $6,000 in cash in addition to the 30 shares

From Pete—
Equipment ($30,000 of depreciation taken by Pete in prior years)
$45,000 Basis to Transferor
$99,000 Fair Market Value
30 Number of Shares Issued, Pete receives $9,000 in cash in addition to the 30 shares.

From Cara—
Proprietary process
$15,000 Basis to Transferor
$90,000 Fair Market Value
30 Number of Shares Issued

From Jen—
Cash
$30,000 Basis to Transferor
$30,000 Fair Market Value
10 Number of Shares Issued

Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information:

During discussions relating to the formation of Kingfisher, Seth mentions that he may be interested in either (1) just selling all his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in Kingfisher’s formation as shown above but followed by a sale of his stock five-years later for $90,000. What would be the tax cost of these alternative plans stated in the present value terms? Refer to the table and assume a discount rate of 6%. Assume Seth’s marginal income tax rate is 35% and his capital gains rate is 15%.

This image shows a table illustrating discount factors at various interest rates over different time periods, commonly used in financial calculations to determine the present value of future cash flows.

### Table Headers:
- **Interest Rates**: Column headers represent interest rates from 2% to 9%.
- **Periods**: Row headers represent periods from 1 to 20.

### Table Values:
- Each cell represents the discount factor calculated with the corresponding period and interest rate.

#### Detailed Breakdown:
- **2% Column**:
- Period 1: 0.9804
- Period 2: 0.9612
- Period 3: 0.9423
- Periods continue similarly until Period 20: 0.6730

- **3% Column**:
- Period 1: 0.9709
- Period 2: 0.9426
- Period 3: 0.9151
- Periods continue similarly until Period 20: 0.5537

- **3.75% Column**:
- Period 1: 0.9639
- Period 2: 0.9290
- Period 3: 0.8954
- Periods continue similarly until Period 20: 0.4789

- **4% Column**:
- Period 1: 0.9615
- Period 2: 0.9246
- Period 3: 0.8890
- Periods continue similarly until Period 20: 0.4564

- **4.25% Column**:
- Period 1: 0.9592
- Period 2: 0.9201
- Period 3: 0.8856
- Periods continue similarly until Period 20: 0.4350

- **5% Column**:
- Period 1: 0.9524
- Period 2: 0.9070
- Period 3: 0.8638
- Periods continue similarly until Period 20: 0.3769

- **6% Column**:
- Period 1: 0.9434
- Period 2: 0.8900
- Period

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