Problem 4-35 (LO. 1, 7) Rhonda owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel, have decided that additional contributions of capital are needed if Peach is to remain successful in its competitive industry. The two shareholders have agreed that Rhonda will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the transaction, Rhonda will hold 75% of Peach Corporation and Rachel's interest will fall to 25%. a. What gain is realized on the transaction? How much of the gain will be recognized? b. Rhonda is not satisfied with the transaction as proposed. Assume Rachel agrees to transfer $1,000 of cash in exchange for additional stock. In this case, Rhonda will own slightly less than 75% of Peach and Rachel's interest will be slightly more than 25%. How will the consequences change? Rhonda's plan to avoid recognizing a gain be successful. Rachel's interest be counted, since the value of the stock she would receive is compared to the value of the stock she already owns. c. If Rhonda still is not satisfied with the result, what should be done to avoid any gain recognition? Rhonda can transfer property that appreciated in value. Rachel could contribute property of an amount that small relative to the value of the stock already owned.
Problem 4-35 (LO. 1, 7) Rhonda owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel, have decided that additional contributions of capital are needed if Peach is to remain successful in its competitive industry. The two shareholders have agreed that Rhonda will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the transaction, Rhonda will hold 75% of Peach Corporation and Rachel's interest will fall to 25%. a. What gain is realized on the transaction? How much of the gain will be recognized? b. Rhonda is not satisfied with the transaction as proposed. Assume Rachel agrees to transfer $1,000 of cash in exchange for additional stock. In this case, Rhonda will own slightly less than 75% of Peach and Rachel's interest will be slightly more than 25%. How will the consequences change? Rhonda's plan to avoid recognizing a gain be successful. Rachel's interest be counted, since the value of the stock she would receive is compared to the value of the stock she already owns. c. If Rhonda still is not satisfied with the result, what should be done to avoid any gain recognition? Rhonda can transfer property that appreciated in value. Rachel could contribute property of an amount that small relative to the value of the stock already owned.
Chapter18: Corporations: Organization And Capital Structure
Section: Chapter Questions
Problem 32P
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Transcribed Image Text:Problem 4-35 (LO. 1, 7)
Rhonda owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel, have decided that additional
contributions of capital are needed if Peach is to remain successful in its competitive industry. The two shareholders have agreed that
Rhonda will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the
transaction, Rhonda will hold 75% of Peach Corporation and Rachel's interest will fall to 25%.
a. What gain is realized on the transaction?
How much of the gain will be recognized?
b. Rhonda is not satisfied with the transaction as proposed. Assume Rachel agrees to transfer $1,000 of cash in exchange for additional
stock. In this case, Rhonda will own slightly less than 75% of Peach and Rachel's interest will be slightly more than 25%.
How will the consequences change?
Rhonda's plan to avoid recognizing a gain
be successful. Rachel's interest
be counted, since the
value of the stock she would receive is
compared to the value of the stock she already owns.
c. If Rhonda still is not satisfied with the result, what should be done to avoid any gain recognition?
Rhonda can transfer property that
appreciated in value. Rachel could contribute property of an amount that
small relative to the value of the stock already owned.
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