Question

In: Accounting

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with...

Bonnie and Clyde are the only two shareholders in Getaway Corporation. Bonnie owns 60 shares with a basis of $6,600, and Clyde owns the remaining 40 shares with a basis of $15,000. At year-end, Getaway is considering different alternatives for redeeming some shares of stock. Evaluate whether each of the following stock redemption transactions will qualify for sale and exchange treatment.

a. Getaway redeems 10 of Bonnie’s shares for $5,000. Getaway has $26,000 of E&P at year-end and Bonnie is unrelated to Clyde.

Bonnie owns 60% before the redemption and % after the redemption.
Does this qualify as a sale or exchange? If so, how much is the gain?

b. Getaway redeems 29 of Bonnie’s shares for $10,000. Getaway has $26,000 of E&P at year-end and Bonnie is unrelated to Clyde.

Bonnie owns 60% before the redemption, % after the redemption.
Does this qualify as a sale or exchange? If so, how much is the gain?

c. Getaway redeems 8 of Clyde’s shares for $5,500. Getaway has $26,000 of E&P at year-end and Clyde is unrelated to Bonnie.

Bonnie owns 60% before the redemption, % after the redemption.
Does this qualify as a sale or exchange? If so, how much is the gain?

Solutions

Expert Solution

Cost per share

Bonnie = $6600/60 =$110/shares

Clyde = $15000/40 = $375/share

a)   

Particulars Gateway Total Bonnie Clyde
No of Shares Issued - Begining 100 60 40
Redemption 10 10 -
Remaining 90 50 40

Hence, Bonnie's holding after redemption = 50/90 x 100 = 55.56%

This would qualify for sale

Sale Proceed = $5,000

Cost Basis ($110x10) = ($1,100)

Gain = $3,900

B)   

Particulars Gateway Total Bonnie Clyde
No of Shares Issued - Begining 100 60 40
Redemption 29 29 -
Remaining 71 31 40

Hence, Bonnie's holding after redemption = 31/71 x 100 = 43.66%

This would qualify for sale

Sale Proceed = $10,000

Cost Basis ($110x29) =    ($3,190)

Gain =    $6,810

c)   

Particulars Gateway Total Bonnie Clyde
No of Shares Issued - Begining 100 60 40
Redemption 8 - 8
Remaining 92 60 32

Hence, Bonnie's holding after redemption = 60/92 x 100 = 65.22%

This would qualify for sale

Sale Proceed = $5,500

Cost Basis ($375x8) =    ($3,000)

Gain =    $2,500


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