Question

Small Company was liquidated in the current year by Parent Company, its sole shareholder. Parent received the following assets on June 15 pursuant to the liquidation: Basis to Fair Small Market Value Cash $100,00o$100,000 Accounts receivable 40,000 40,000 Plant assets (net) 70,000 90,000 Land (mortgage on land $40,000)90,000 110.000 Total $300,00o$340,000 Also pursuant to the liquidation, Parent assumed the mortgage of $40,000 on the land. Parent Corporation's basis in Small common stock is $205,00O. What are the amount and the character of the gain or loss Parent must recognize from the liquidation? $95.000 capital gain. KE $135.000 capital gain. IN $340.000 dividend

Answer 1

$95,000 Capital Gain

Step-by-step explanation:

First, note that during liquidation, the fair market value should be used for the valuation of assets

Step 1: Calculate the Net Assets taken over at Fair Market Value

Total Assets at the Market Value = $340,000

Subtact: Liabilities (land Mortgage) = ($40,000)

The Net Asset at Fair market value = $300,000

Step 2: Calculate the Capital Gain or loss from the Liquidation

fair Value of Net Assets Taken Over = $300,000 (from step 1)

Subtract: The Common stock of Small Com. = ($205,000)

The Capital Gain = $95,000