In: Accounting
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.
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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.
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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.
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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