Question

Andre receives 50 shares of stock with a fair market value of $200,000 plus $50,000 cash in exchange for his contribution of machinery, land and inventory valued at (adjusted basis of) $40,000 ($10,000), $150,000 ($180,000) and $60,000 ($50,000), respectively. How much gain does Andre recognize?

Answer 1

Andre recognizes a gain of $170,000 on the exchange.

Step-by-step explanation:

When Andre receives 50 shares of stock with a fair market value of $200,000 plus $50,000 cash, he recognizes a gain based on the difference between the fair market value of the exchanged property and the adjusted basis of the property contributed. In this case, the adjusted basis of the machinery is $10,000, the adjusted basis of the land is $180,000, and the adjusted basis of the inventory is $50,000. The total adjusted basis of the contributed property is $240,000 ($10,000 + $180,000 + $50,000).

The fair market value of the contributed property is $410,000 ($200,000 + $50,000 + $160,000). Andre recognizes a gain of $170,000 ($410,000 - $240,000) on the exchange.