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During discussions relating to the formation of Kingfisher, Seth mention that he may be interested in either (1) just selling all of his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in Kingfisher's formation as shown above but followed by a sale of his stock five years later for $90,000
During discussions relating to the formation of Kingfisher, Seth mention that he may be interested in either (1) just selling all of his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in Kingfisher's formation as shown above but followed by a sale of his stock five years later for $90,000. What would be the tax cost of these alternative plans, stated in present value terens? Assume a discount rate of 6%. The present value factors at 6% are 1.000 for year 1 and 0.7473 for years. Further, assume Seth's marginal income tax rate is 35% and his capital gains rate is 15% If required, round your answers to the nearest dollar, The present value of Seth's tax cost associated with the current sale of inventory (alternative 1) for $96,000 is The present value of Seth's tax cost associated with the current receipt of 30 Kingfisher shares and 56,000 cash (alternative 2) and the subsequent sale of 30 Kingfisher shares for $90,000 in five years is
Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration: Consideration Transferred Basis to Transferor Fair Market Value Number of Shares Issued From Seth Inventory $30,000 $96,000 30* From Pete- 45,000 99,000 30** Equipment ($30,000 of depreciation taken by Pete in prior years) From Cara- Proprietary process 15,000 90,000 30 From Jen Cash 30,000 30,000 10 *Seth receives $6,000 in cash in addition to the 30 shares. **Pete receives $9,000 in cash in addition to the 30 shares.
*Seth receives $6,000 in cash in addition to the 30 shares. **Pete receives $9,000 in cash in addition to the 30 shares. The value of each share of Kingfisher stock is $3,000. if there is no gain or loss, enter $0 for the amount. As to these transactions, provide the following information for parts (a) - (I). a. Seth's recognized gain or loss. Identify the nature of any such gain or loss. Seth recognizes $ 6,000 as ordinary income.
Expert Solution
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Assume Tax rate = 35%
Capital Gain Tax rate = 15%
The present value factors at 6% for year 1 is 1.000 and for 0.7473 for year 5.
| Seth's tax cost associated with the current sale of inventory for $96000 | ||
| Amount realised | $96,000 | |
| Less: Adjusted basis | -$30,000 | |
| Ordinary gain recognized | $66,000 | |
| Tax cost ($66,000 × 35%) | $23,100 | |
| present value factors at 6% for year 1 | $1 | |
| Present value of tax cost | $23,100 | |
| Seth's tax cost associated with the current receipt of 30 Kingfisher shares and $6,000 cash and the subsequent sale of 30 Kingfisher shares for $90,000 in five years is $ | ||
| Current ordinary gain recognized on formation of Kingfisher | $6,000 | |
| Tax cost ($6,000 × 35%) | $2,100 | |
| present value factors at 6% for year 1 | $1 | |
| Present value of tax cost | $2,100 | |
| Capital gain recognized on sale of Kingfisher shares in five years | ||
| Amount realised | $90,000 | |
| Less: Adjusted basis | -$30,000 | |
| Ordinary gain recognized | $60,000 | |
| Tax cost ($60,000 × 15%) | $9,000 | |
| present value factors at 6% for year 5 | $0.75 | |
| Present value of tax cost | $6,725.7 | |
| Total present value of tax cost (2100+6725.7) | $8,825.7 |
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