Question

On October 3, 2017, two individuals form Gray Corporation under section 351 and acquired 100% of the stock. These individuals, Mary and West, made the following contributions:

                                                      Adjusted basis             Fair Market

                                                                                                   Value

From Mary- Cash                                   $360000             $360000

Patent                                                     $0                       $40000

                                           

From West - Equipment

(deprecition claimed of $100000)           $240000             $370000

Mary and West received the stock in proportion to the value of the assets transferred. Which statement is correct?

A) Mary must recognize income of $40000; West has no income

b) Neither Jane nor Walt recognizes income

c) West must recognize income of $130000; Mary has no income

d) West must recognize income of $100000; Mary has no income

e) None of the above

Answer 1

I would try to answer with Accounting standards followed in India which seems like logical answer here as well. According to that, the answer is option (e).

The correct answer is Mary recognizes $40,000 as income because the valauation of assets she brings in the business is $400000 whereas same valuation in her current balancesheet will be reflected as 360000$ only hence she makes a profit of $40,000 which she will recognize as income.

West will recognize income of $130000 because the current value of equipment he brings in is $240000 whereas it is valued at $370000 in the new company. Hence he makes a profit of $130000.