Korak, Inc.'s equity section appears as follows:
Capital stock, 1,000 shares, par $1 |
$ 1,000 |
|
Paid-in capital |
9,000 |
|
Earnings and profits |
30,000 |
Korak redeems 40 percent of its shares for $17,000 from an
individual shareholder with a basis of $20,000 in a transaction
qualifying as a complete termination.
(a.) What is the amount and character of gain or loss recognized by
the shareholder?
(b.) The corporation?
(c.) What does the equity section look like after the
redemption?
1. Amount of gain or loss recognized by the shareholder:
Sale Price: | 17000 |
(-) Purchase Price: 40% of 1000 shares= 400 Shares so, purchase price will be 400 shares * $1 |
400 |
Gain to shareholder | 16600 |
2. Amount of gain or loss recognized by the Corporation:
Purchase Price: | 17000 |
(-) Issued Price: 40% of 1000 shares= 400 Shares so, issued price will be 400 shares * $1 |
400 |
Loss to Corporation (to be deducted from Earnings & Profits) | 16600 |
3. Equity after redemption:
Capital stock, 600 shares, par $1 (1000-400) |
600 |
Paid-in capital (9000-400) |
8600 |
Earnings and profits (30000-16600) |
13400 |
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