Question

Korak, Inc.'s equity section appears as follows: Capital stock, 1,000 shares, par $1 $ 1,000 Paid-in...

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?

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Homework Answers

Answer #1

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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