Question

In: Accounting

Red Corporation is owned entirely by Alex and Betty (who are unrelated unless otherwise stated). Alex...

Red Corporation is owned entirely by Alex and Betty (who are unrelated unless otherwise stated). Alex owns 60 shares of Red Corporation’s common stock (bought in one transaction for $600). Betty owns 40 shares of Red Corporation’s common stock (with an adjusted basis of $30 per share). The stock’s FMV is $20 per share. Red Corporation’s E&P is $500. Red Corporation uses the accrual method of accounting. What are the results to the parties from the alternative transactions in each of the following situations? Provide the amount and character of shareholder income or loss and the impact on Red Corporation’s E&P.

  1. Alex sells 10 Red Corporation shares to Betty for $200. Alternatively, what should Alex do if $50 of Red’s shares have a $10 per share basis and the other 10 shares have a $20 per share basis? Are there any circumstances in which this sale could be a redemption?
  2. Alex sells 30 shares back to Red Corporation for $600.
  3. Alex sells 20 shares back to Red Corporation for $400.
  4. What would result to Betty if Red redeems 10 of Betty’s shares for $200? What is the minimum number of shares that Betty must have redeemed to ensure sale or exchange treatment?
  5. Alex sells 10 shares back to Red for $200. What is instead of an individual, Alex is actually a corporation.
  6. Alex sells 30 shares back to Red for $600. Shortly thereafter, Betty sells 10 shares back to Red for $200 in an exchange that had been agreed to in the preceding year. What would result to Betty? What would result to Alex if Betty sold 11 shares, rather than 10?
  7. In one transaction, Alex sells 20 Red shares to Betty for $400 and 10 shares back to Red for $200.
  8. Alex sells 30 shares back to Red for $600. What would result if Alex and Betty are “related” in the following alternative ways:
    1. Betty is Alex’s brother and their father is living
    2. Betty is Alex’s equal partner in a two-person partnership. What if the partnership owns an option to purchase Betty’s shares in Red?
    3. Betty is a corporation in which Alex owns one half of the stock

Solutions

Expert Solution

Red Corporation is owned entirely by Alex and Betty (who are unrelated unless otherwise stated). Alex owns 60 shares of Red Corporation’s common stock (bought in one transaction for $600). Betty owns 40 shares of Red Corporation’s common stock (with an adjusted basis of $30 per share). The stock’s FMV is $20 per share. Red Corporation’s E&P is $500. Red Corporation uses the accrual method of accounting. What are the results to the parties from the alternative transactions in each of the following situations? Provide the amount and character of shareholder income or loss and the impact on Red Corporation’s E&P.

  1. Alex sells 10 Red Corporation shares to Betty for $200. Alternatively, what should Alex do if $50 of Red’s shares have a $10 per share basis and the other 10 shares have a $20 per share basis? Are there any circumstances in which this sale could be a redemption?

Answer : i) No impact on Red CorporationE&P .

ii) Betty earned profit $ 30 and Alex losses $ 30 because the Value of share of Red Corporation is $23 as below

Name of Shareholders

Nos of Share

Amount in $

Alex

60

600

Betty

40

1200

Total

100

1800

Add : E&P of Red Corp

500

Total Shareholder Fund

2300

Total Nos. Of Shares

100

Value per shares

23

iii) Alex Shareholding decrease by 10% and Betty Shareholding increase by 10%.

  1. Alex sells 30 shares back to Red Corporation for $600.

Answer: i) Red Corporation E&P increase by $90 [30*$3($23-$20) ]

ii) Alex losses increased by $90 [30*$3($23-$20) ]

  1. Alex sells 20 shares back to Red Corporation for $400.

Answer: i) Red Corporation E&P increase by $60 [20*$3($23-$20) ]

ii) Alex losses increased by $60 [20*$3($23-$20) ]

  1. What would result to Betty if Red redeems 10 of Betty’s shares for $200? What is the minimum number of shares that Betty must have redeemed to ensure sale or exchange treatment?

Answer: i) Red Corporation E&P increase by $30 [10*$3($23-$20) ]

ii) Betty losses increased by $30 [10*$3($23-$20) ]

  1. Alex sells 10 shares back to Red for $200. What is instead of an individual, Alex is actually a corporation.

Answer: i) Red Corporation E&P increase by $30 [10*$3($23-$20) ]

ii) Alex losses increased by $30 [10*$3($23-$20) ]

  1. Alex sells 30 shares back to Red for $600. Shortly thereafter, Betty sells 10 shares back to Red for $200 in an exchange that had been agreed to in the preceding year. What would result to Betty? What would result to Alex if Betty sold 11 shares, rather than 10?

Answer: i) Red Corporation E&P increase by $90 [30*$3($23-$20) ]

ii) Alex losses increased by $90 [30*$3($23-$20) ]

iii) Red Corporation E&P increase by $30 [10*$3($23-$20) ]

iv) Betty losses increased by $30 [10*$3($23-$20) ]

  1. In one transaction, Alex sells 20 Red shares to Betty for $400 and 10 shares back to Red for $200.

Answer: i) Betty earning increase by $60 [20*$3($23-$20) ]

ii) Alex losses increased by $60 [20*$3($23-$20) ]

iii) Red Corporation E&P increase by $30 [10*$3($23-$20) ]

iv) Betty losses increased by $30 [10*$3($23-$20) ]


Related Solutions

Red Corporation is owned entirely by Alex and Betty (who are unrelated unless otherwise stated). Alex...
Red Corporation is owned entirely by Alex and Betty (who are unrelated unless otherwise stated). Alex owns 60 shares of Red Corporation’s common stock (bought in one transaction for $600). Betty owns 40 shares of Red Corporation’s common stock (with an adjusted basis of $30 per share). The stock’s FMV is $20 per share. Red Corporation’s E&P is $500. Red Corporation uses the accrual method of accounting. What are the results to the parties from the alternative transactions in each...
Interest is compounded annually unless stated otherwise. Payments are at the end of the year unless...
Interest is compounded annually unless stated otherwise. Payments are at the end of the year unless stated otherwise. All bonds have a face value of $1000. Taxes are 0 unless specified otherwise. 2. A project has a beta of 1.3. The risk-free return is 2% and the return on the market is 12%. The project has an IRR of 14%. a) If the firm’s cost of capital is 10%, will they take the project using the cost of capital? b)...
Interest is compounded annually unless stated otherwise. Payments are at the end of the year unless...
Interest is compounded annually unless stated otherwise. Payments are at the end of the year unless stated otherwise. All bonds have a face value of $1000. Taxes are 0 unless specified otherwise. Use the following information to estimate the weights for the cost of capital equation for STANCO: From the balance sheet: Assets = 800M. Debt = 200M and Equity = 600M The firm has 20M shares outstanding that trade for $50 per share. The market value of the debt...
Interest is compounded annually unless stated otherwise. Payments are at the end of the year unless...
Interest is compounded annually unless stated otherwise. Payments are at the end of the year unless stated otherwise. All bonds have a face value of $1000. 3. Lettuce Unite expects free cash flows of $10B next year, growing by 15% until year 2. After year 2, the growth rate falls to 4%. The cost of capital is 14%. They have $2B in cash and marketable securities and $25B in debt. There are 8B shares outstanding. Find the share price.
Round to the fourth and write as a proportion unless otherwise stated. Problem 2 A food...
Round to the fourth and write as a proportion unless otherwise stated. Problem 2 A food chemist analyzed the calorie content for a popular type of chocolate cookie. Following are the number of calories in a random sample of eight cookies. Calorie content follows a Normal Distribution. 113 114 111 116 115 120 118 116 a. For a 95% confidence interval, find the margin of error for the mean number of calories in this type of cookie. Show your work...
Round to the fourth and write as a proportion unless otherwise stated. Problem 3 A sociologist...
Round to the fourth and write as a proportion unless otherwise stated. Problem 3 A sociologist randomly sampled 200 people who worked in computer-related jobs and found that 21% of them have changed jobs over the last six months. a. For a 99% confidence interval, find the margin of error for the true proportion that changed their jobs over the last six months. b. Build and interpret a 99% confidence interval for the proportion that changed their jobs over the...
Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period....
Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000. Financial Statements and Forecasting (15) You have the following information for Houdini Homes for Year 0: Houdini Homes: Income Statement (M$) Y0 Y1 Sales 1400 Cost of Goods Sold 700 SG&A (Selling, General and Admin) Expenses 200 Depreciation Expense 86 Earnings Before Interest & Tax (EBIT) 414 Interest Expense 34 Earnings Before Tax 380 Taxes (25%) 95 Net...
Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period....
Unless stated otherwise, interest is compounded annually, and payments occur at the end of the period. Face value for bonds is $1000. 10. (15) Ghost Screams is considering a new product line. It requires a new machine that will cost $24,000,000. The machine will be fully depreciated to a zero-book value on a straight-line basis over 3 years. The project will generate $72,000,000 in revenues each year for 3 years. Variable costs are 75% of sales and fixed costs are...
The stock in Black Corporation is owned by Sam and Susan, who are unrelated. Sam owns...
The stock in Black Corporation is owned by Sam and Susan, who are unrelated. Sam owns 70% and Susan owns 30% of the stock in Black Corporation. The following assets are to be distributed in complete liquidation of Black Corporation: Adjusted Fair Market Basis Value Cash $100,000 $100,000 Inventory 120,000 140,000 Equipment 220,000 180,000 Land 150,000 180,000 a. What gain or loss would Black Corporation recognize if it distributes the cash, inventory, and equipment to Sam and the land to...
Unless otherwise stated, answer in complete sentences, and be sure to use correct English spelling and...
Unless otherwise stated, answer in complete sentences, and be sure to use correct English spelling and grammar. Sources must be cited in APA format. Your response should be two (2) to four (4) pages in length; refer to the "Assignment Format" page for specific format requirements. Lesson 1, 2, 3, and 4 of this course has covered a wide variety of topics. Thus far, you have learned a great deal of information on health insurance, medical contracts, HIPAA, physician and...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT