741 B Reorganization: Computation of Gain/Loss and Basis. K owns 1,000 shares of

Question

741 B Reorganization: Computation of Gain/Loss and Basis. K owns 1,000 shares of Target Corporation's common stock. She purchased the stock five years ago for $100 per share. K also owns $80,000 of Target's bonds, which she purchased for $80,000. As part of a B reorganization, K exchanges her stock and bonds for 500 shares of Acquiring Corporation's common stock with a fair market value of $300 per share plus $100,000 of Acquiring Corporation's bonds with a fair market value of $90,000, a. Compute K's realized and recognized gain or loss. b. Compute K's basis in the Acquiring Corporation stock and bonds. c. Same facts as above except K's share of Target's accumulated earnings and profits is $10,000. Would this change your answer to (a) or (b) above?

Explanation / Answer

a.) Cost of shares = 1000*100 = 100,000

Bonds = 80,000

Total = 1,80,000

In exchnage she gets :

Shares with mkt value = 500*300 = 150,000

Bonds with 100,000 value = market value = 90,000

Realised gain : 180,000 - (150000+90000) = 60,000 profit

Recognised = 180,000 - (150000+100000) = 70,000 profit

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