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5 Oct 2018

AB Corporation declares a nontaxable stock dividend payable inrights to subscribe to common stock. One right and $100 entitle theholder to subscribe to one share of stock. One right is issued foreach share of stock owned. T, a shareholder, owns 100 shares ofstock that she purchased two years ago for $70 per share. At thedate of the distribution of the rights, the fair market value ofthe stock was $200 and the fair market value of each right was $40.T received 100 rights. T exercised 60 rights and sold the remaining40 rights for $70 per right.

a. How much in taxable income does Thave as a result of receiving the rights (5)

b. What is the tax basis of each ofthe stocks acquired with the 60 rights (15)?

c. What are the tax consequences to Twhen the 40 rights are sold (10)?

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Hubert Koch
Hubert KochLv2
6 Oct 2018

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On July 1, 2018, Chen Company issued for $8400000 a total of80,000 shares of $100 par value, 7% noncumulative preferred stockalong with one detachable warrant for each share issued. Each sharewarrant contains right to purchase one share of Chen 10 par valuecommon stock for $15 per share. The stock without the warrantswould normally sell for 8200,000. The market price of the rights onJuly 1 2018 was 2.50 per right. On October 31, 2018 when the marketprice of the common stock was 19 per share and the market value ofthe rights was 3.00 per right. 32,000 rights were exercised.

Prepare entry to record the issuance on 7/1/2018.

What journal entries are related to the issuance of the commonstock?

On 1/1/2017 the stockholders adopted a stock option plan for topexecutives whereby each would receive right to purchase up to18,000 shares of common stock at $40 per share. The par value is$10 per share.

Trask Corporation, a public company whose shares are traded in the over-the-counter market, had the following shareholders' equity account balances at December 31, 2016:

Common stock $7,875,000

Additional paid-in capital (including stock options) $16,050,000

Retained earnings $16,445,000

Treasury common stock $750,000

Transactions during 2017 and other information relating to the shareholders' equity accounts follow:

As of January 1, 2017, Trask had 4,000,000 authorized shares of $5 par-value common stock; it had issued 1,575,000 shares of which 75,000 were held in treasury.

On January 21, 2017, Trask issued 50,000 shares of $100 par value, 6% cumulative preferred stock at par in exchange for all of Rover Company's assets and liabilities. On that date, the net carrying amount of Rover's assets and liabilities equaled their fair values.

On January 22, 2017, Rover distributed the Trask shares to its stockholders in a complete liquidation and dissolution of Rover. Trask had 150,000 authorized shares of preferred stock.

On February 17, 2017, Trask formally retired 25,000 of 75,000 treasury common stock shares. The shares were originally issued at $15 per share and had been acquired on September 25, 2016, for $10 per share.

Trask owned 15,000 shares of Harbor Inc. common stock purchased in 2016 for $600,000. The Harbor stock shares are carried t fair value with price changes included in net income. On March 5, 2017, Trask declared a property dividend of one share of Harbor common stock for every 100 shares of Trask common stock held by a shareholder of record on April 16, 2017. Harbor stock's market price on March 5, 2017, was $60 per share. The property dividend was distributed on April 29, 2017.

On January 2, 2012, Trask granted stock options to employees to purchase 200,000 shares of the company's common stock at $12 per share, which was also the market price on that date. The options had a grant date fair value of $1.50 per share and are exercisable within a three-year period, beginning January 2, 2017. On June 1, 2017, employees exercised 150,000 options when the stock's market value was $25 per share. Trask issued new shares to settle the transaction.

On December 12, 2017, Trask declared the yearly cash dividend on preferred stock, payable on January 11, 2018, to shareholder of record on December 31, 2017.

On January 16, 2018, before the accounting records were closed for 2017, Trask learned that depreciation expense had been understated by $350,000 for the year ended December 31, 2016. The after-tax effect on 2016 net income was $245,000. The appropriate correcting entry to adjust January 1, 2017 retained earnings was recorded on the same day.

Net income for 2017 was $2,400,000.

Required:

Prepare a schedule to show how Trask's retained earnings changed from January 1, 2017, to December 31, 2017.

Prepare the shareholders' equity section of Trask's balance sheet at December 31, 2017.

Compute the book value per share of common stock at December 31, 2017

Aubrey Newman transferred two items of property to Ncorporation, in return for 800 shares of N corporation (which hadonly 150 shares outstanding prior to Aubrey's transfer). One itemshe transferred had an adjusted basis of $10,000 and fair marketvalue of $15,000 and was subject to an $8,000 liability. The seconditem had an adjusted basis of $2,000 and a fair market value of$5,000 and was subject to a $3,000 liability. In return, shereceived the 800 shares of stock with a fair market value of $8,000plus $2,000 in cash. Please address the following: 1 Is thisexchange taxable to Aubrey and N corporation? Why or why not? 2What is the amount of gain (if any) that Aubrey must recognize onthis ex- change? 3 What is her basis in the N corporation stock shereceives? 4 What is the basis of N corporation in the assets itreceives in the transfer? 5 How would your answer differ if Aubreyperformed services (instead of transferring property) in return forthe shares of N corporation? 2- Cotte Inc. has three shareholders,Phil, Bill, and Hill. Each shareholder owns 100 shares of commonstock. On July 1 of this year, Cotte Inc. redeemed 30 shares fromeach share- holder. In return, each shareholder received $10,000.Phil acquired his shares three years ago and his adjusted ba- sisin his 100 shares was $3,000 at the time of the redemption. Cottehas $100,000 of accumulated E&P as of the end of the prioryear, and anticipates earning a further $20,000 in E&P in thecurrent year. Please address the following: 1 What are the federaltax consequences to Cotte, Inc. and Phil arising from thisdistribution? 2 Would your answer to 1. change if the reason CotteInc. redeemed the shares was because it sold one of its businessesit actively had been con- ducting since 1990? 3 Would your answerto 1. change if the only transaction was a redemption of 60 ofPhil's shares, while Bill and Hill continued to hold their original100 shares? 4 Would your answer to 3. change if Bill, Phil, andHill were siblings? 3 - At the beginning of the year, Jenny, Inc.(a corporation for tax purposes) had a negative $15,000 in E&P.During the year,  the company had $5,000 in profits. On July 1,the company distributed property with an adjusted basis of $50,000and a fair market value of $40,000 to Jenny (an individual), thesole shareholder of the corporation. It was the only distributionthat the company made during the year. Jenny's stock in the companyhad a fair market value of $50,000 and an adjusted basis of$20,000. Please address the following: 1 What is the amount of thedistribution to Jenny? 2 What are the federal tax consequences toJenny of the distribution? 3 What are the federal tax consequencesto Jenny, Inc. of the distribution? 4 What alternative transactionwould have given Jenny and Jenny Inc.a bet- ter result here?

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