In accounting for a contingent liability, if the likelihood ofthe obligation is probable but the amount cannot be estimated, acompany must
recognize the liability and report it on the balance sheet.
do nothing.
not recognize or disclose the liability until it is certain andthe exact amount is known.
provide disclosure in the footnotes to the financialstatements.
In accounting for a contingent liability, if the likelihood ofthe obligation is probable but the amount cannot be estimated, acompany must
recognize the liability and report it on the balance sheet.
do nothing.
not recognize or disclose the liability until it is certain andthe exact amount is known.
provide disclosure in the footnotes to the financialstatements.
Related questions
Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, âThe Human Vacuum Cleaner.â Brooks operated his business as a sole proprietorship and used the cash method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the companyâs common stock. The corporation would also assume the companyâs liabilities (payables and mortgage). (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)
| Balance Sheet | |||||
| Adjusted Basis | FMV | ||||
| Assets | |||||
| Accounts receivable | $ | 0 | $ | 5,000 | |
| Cleaning equipment (net) | 25,000 | 20,000 | |||
| Building | 50,000 | 75,000 | |||
| Land | 25,000 | 50,000 | |||
| Total assets | $ | 100,000 | $ | 150,000 | |
| Liabilities | |||||
| Accounts payable | $ | 0 | $ | 10,000 | |
| Salaries payable | 0 | 5,000 | |||
| Mortgage on land and building | 35,000 | 35,000 | |||
| Total liabilities | $ | 35,000 | $ | 50,000 | |
a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?
|
b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporationâs stock?
Gain or loss recognized -
d. What tax basis does Brooks have in the corporationâs stock?
|
e. What is the corporationâs tax basis in each asset it receives from Brooks?
| Tax Basis | |
| Accounts Receivable | |
| Equipment | |
| Building | |
| Land | |
| Total |
f. How much if any gain or loss will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
| Realized gain/loss | |
| Accounts receivable | |
| Equipment | |
| Building | |
| Land | |
| Total | $0 |
