Question

Quadesha, Chanteia and Xiang each acquires a one-third Autry Corporation stock. Each shareholder has a $35,000 basis in their stock. Rhynie Corporation purchases Autry Corporation assets for $200,000 in cash and $300,000 Rhynie notes (three notes, $100,000 each). Autry Corporation has cash of $80,000 and the basis in assets sold is $310,000. Autry also has $120,000 of liabilities. Quadesha, Chanteia and Xiang decide to liquidate Autry after the assets are sold. Analyze this transaction for each person and each corporation. How would your answer change if Rhynie Corporation purchased the stock for $380,000?

Answer 1

1) Sale consideration = 500,000

For Autry Corporation:

Net profit on sale will be recognized = 200000+300000-(80000+310000-120000) = 230000

Journal	Dr	Cr
Cash	120,000
Rhynie Notes	300,000
Liabilities	120,000
To profit on sale		230,000
To other assets		310,000

For Rhynie Corporation: Purchase of assets and liabilities partially with cash and partially with notes for a consideration of 500000:

Journal	Dr	Cr
Net Assets	620,000
To cash		200,000
To Notes payables		300,000
To liabilities		120,000

For each of the shareholder: They will each recieve one-third of the net profit of Autry corporation for liquidating their shareholding:

Share of Profit from Autry Corporation	76,666.67
To Investment in Autry Corporation		35,000.00
To Profit on liquidation of investment		41,666.67

2)  Sale consideration = 380,000: (assume 80,000 cash, 300,000 in notes)

For Autry Corporation:

Journal	Dr	Cr
Cash (80000-80000)	0
Rhynie Notes	300,000
Liabilities	120,000
To profit on sale		110,000
To other assets		310,000

For Rhynie corporation:

Journal	Dr	Cr
Net Assets	500,000
To cash		80,000
To Notes payables		300,000
To liabilities		120,000

For each of the shareholders:

Share of Profit from Autry Corporation	36,666.67
To Investment in Autry Corporation		35,000.00
To Profit on liquidation of investment		1,666.67