Question

On january 1, year 1, ginger, an individual, paid $32,000 for 7 percent of the stock in root corp., an s corporation. in november year 1, he loaned $13,000 to root corp. in return for a promissory note. root corp. generated a $770,000 operating loss in year 1. root corp. generated $425,000 ordinary business income in year 2.

What is the financial impact of Ginger's transactions with Root Corp., considering his stock purchase, loan, and the company's financial performance?

A) Ginger's stock purchase contributed to Root Corp.'s operating loss.
B) The promissory note increased Root Corp.'s ordinary business income.
C) Ginger's stock purchase and loan had no impact on Root Corp.'s financials.
D) Root Corp.'s ordinary business income in year 2 was higher due to Ginger's actions.

Answer 1

Ginger's stock purchase and loan had no impact on Root Corp.'s financials.

Step-by-step explanation:

The financial impact of Ginger's transactions with Root Corp. can be analyzed as follows:

1. Ginger's stock purchase of 7% contributed to Root Corp.'s operating loss of $770,000 in year 1. Since Ginger owns a percentage of the company, any losses incurred by Root Corp. are passed on to him proportionally.
2. The promissory note loan of $13,000 made by Ginger to Root Corp. does not directly impact the company's financials. It is a loan and not an investment, so it does not affect the company's income or expenses.
3. Root Corp.'s ordinary business income in year 2, which was $425,000, is not directly attributable to Ginger's actions. The income generated by the company is independent of Ginger's stock purchase or loan.

Therefore, the correct answer is C) Ginger's stock purchase and loan had no impact on Root Corp.'s financials.