Dawn, a sole proprietor, was engaged in a service business and reported her income on a cash basis. In 2018, she incorporated her business by transferring the assets of the business to a new corporation in return for all the stock in the corporation plus the corporation’s assumption of the liabilities of her proprietorship. All the receivables and the unpaid trade payables were transferred to the new corporation. The assets of the proprietorship had total basis of $125,000 and total fair market value of $300,000. The trade accounts payable assumed by the corporation totaled $35,000, and were for services rendered by third parties directly to customers of the business under Dawn’s supervision. The corporation also assumed a note payable to the bank, in the amount of $95,000. The note was issued for a loan used to purchase computers and other business equipment used in the business and transferred to the corporation.

a. Dawn has a taxable gain on the transfer of $5,000.

b. Dawn has a basis of $20,000 in the stock she receives.

c. Dawn has a basis of $10,000 in the stock she receives.

d. Dawn has a basis of $30,000 in the stock she receives.

e. Dawn has a basis of $235,000 in the stock she receives.

Answer:

d. Dawn has a basis of $30,000 in the stock she receives.

Explanation:

The computation is shown below:

= Total assets basis -  total liabilities in terms of note payable

= $125,000 - $95,000

= $30,000

So Dawn has the basis of $30,000 in terms of the stock she received

Therefore the option d is correct

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Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct

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