Finance Case Study

852 Words Feb 1st, 2018 3 Pages
a) Adjusted basis is the original cost of the asset, plus improvements, less depreciation. Thus the asset has seen its basis reduced from what was originally $500 to $300. The mortgage owing further reduces the basis for this asset to $150. If X sends back stock worth $350, then A records a $200k profit on the deal. X will lose $200k on the deal, which is $50k on the asset and then another $200k in assumed debt. The loss that X takes on the deal is 83% attributable to A, an amount of $166. This loss, combined with the $200 profit, means that the net taxable profit for A is $200-166 = $34k.
b) The basis is what was paid for the asset. This is regardless of whether or not there was a difference between the basis of the fair market value (IRS, 2013). A's basis for the stock is now $200, which is what it paid for the stock ($350-150). However, the company could take the basis of the FMV of the stock at the time of the transfer, since it recorded such a profit on the deal. The FMV at the time of the transfer is $350k.
2. a) The transaction between C and Y does not generate a profit because both firms swapped $50. The trade between B and Y did generate a profit. To calculate the profit, we use the adjusted basis for the value of the assets. B sent an asset worth $5 (adjusted basis) to Y for $100 worth of shares and cash. Thus, there was a profit for B of 100 5 = $95. B also books 75% of the loss attributable to A, so (.75*95 = 71.25). The net profit for B in this transaction…