What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize? Note: Leave no answer blank. Enter zero if applicable Negative amount should be indicated by a minus sign

What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize? Note: Leave no answer blank. Enter zero if applicable Negative amount should be indicated by a minus sign

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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Concept explainers

Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.

Question

Ramona and Hermione formed Wiley Corporation on January 2. Ramona contributed cash of $305,000 in return for 50 percent of the
corporation's stock. Hermione contributed a building and land with the following fair market values and adjusted tax bases in return for
50 percent of the corporation's stock:
Building
Land
Total
FMV
$ 114,375
266,875
$ 381,250
Adjusted Tax
Basis
$ 30,500
122,000
$ 152,500
To equalize the exchange, Wiley Corporation paid Hermione $76,250 in addition to her stock.
Required:
What amount of gain or loss does Hermione realize on the formation of the corporation? What amount, if any, does she recognize?
Note: Leave no answer blank. Enter zero if applicable. Negative amount should be indicated by a minus sign.

i. Assume Hermione's adjusted tax basis in the land was $381,250.
What adjusted tax basis does Wiley Corporation take in the land and building received from Hermione?
Note: Leave no answer blank. Enter zero if applicable. Negative amount should be indicated by a minus sign.
j. Assume Hermione's adjusted tax basis in the land was $381,250.
What election can Hermione and Wiley Corporation make to allow Wiley Corporation to take a carryover basis in the land?

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