Question

Pamela and Amanda form Pansy Corporation. Pamela transfers land (basis of $40,000 and fair market value of $90,000) for 50 shares plus $10,000 cash. Amanda transfers $80,000 cash for 50 shares in Pansy Corporation. a. Pamela’s basis in the Pansy Corporation stock is $40,000. b. Pansy Corporation’s basis in the land is $40,000. c. Pansy Corporation’s basis in the land is $90,000. d. Pamela recognizes a gain on the transfer of $50,000. e. None of the above.

Answer 1

c. Pansy Corporation’s basis in the land is $90,000.

Step-by-step explanation:

Journal Debit Credit

Land Account $90,000

To share capital $80,000

(50 Shares at $80000)

To cash $10,000

GAAP require that a business to record an exchange of stock for property at the fair or market value of the transaction. Hence, one can use either the market value of the common stock or the market value of the land.