Question

27. G is a cash basis consultant. His balance sheet at the end of the year shows receivables of $100 and accounts payable for utilities of $30.

a) What is G’s basis in the receivables?

b) If G transfers the receivables to a new corporation in exchange for 100% of the stock and the corporation assumes the liabilities is G taxed on the transfer?

Answer 1

a)

As G is a Cash basis consultant.The transactions are entered on cash basis unlike on accrual basis .In cash basis the transaction is entered when ther is cash received or Paid But in accrual basis the transactions are enterd on mercantile basis on happening of transaction

Since G is using Cash basis there will be no such accounts receivable or Payable occurs in the balance sheet as the transaction of sale or purchase is recorded on cash basis.

If Gs balance sheet shows any receivable or Payable then he must be using the Accrual basis of accounting

Hence Accrual basis is for Receivables

b)

If G transfer receivables to a new corporation.There may be gain occurs in the transaction due to the exchange of Stock and receivables.It may lead to occurence of the tax

If the exchange happens without any gain then no tax occurs as both the stock and Receivables belongs to Balance sheet and not related to the Profit of taxation.

Hence the taxes which are occurred are treated as liabilities.