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Homework answers / question archive /  Indigo Corporation wants to transfer cash of $150,000 or property worth $150,000 to one of its shareholders, Linda, in a redemption transaction that will be treated as a qualifying stock redemption

 Indigo Corporation wants to transfer cash of $150,000 or property worth $150,000 to one of its shareholders, Linda, in a redemption transaction that will be treated as a qualifying stock redemption

Accounting

 Indigo Corporation wants to transfer cash of $150,000 or property worth $150,000 to one of its shareholders, Linda, in a redemption transaction that will be treated as a qualifying stock redemption. If Indigo distributes property, the corporation will choose between two assets that are each worth $150,000 and are no longer needed in its business: Property A (basis of $75,000) and Property B (basis of $195,000).

 

a. Compute Indigo's recognized gain or loss if it distributes Property A in redemption of Linda's shares.

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Computation of Indigo's recognized gain or loss if it distributes Property A in redemption of Linda's shares:

Recognized Gain or Loss = Fair Market Value - Basis of Property A

= $150,000 - $75,000

Recognized Gain or Loss = $75,000

 

Note: Distribution n redemption of stocks are governed by section 311. Under this provision gains are recognized on the distribution of property.

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