Mary and Sarah are contemplating transferring property to start a new company, M&S Incorporated that will manufacture machines for the construction industry. Mary and Sarah are asking for advice and direction on Section 351 exchanges of property for new corporate stock. They would like you to assist them in understanding the realized gain, recognized gain, and investor basis in the stock with the exchange. They are contemplating transferring property-cash and equipment-to start M&S Incorporated. Mary and Sarah will be 100% owners of the new company.
The following information is available for the year:
• Mary and Sarah will transfer the following assets and liabilities to the newly formed M&S Incorporated. The transaction will provide 100% control of the corporation. No services will be exchanged.
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Mary
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Sarah
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Asset
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(equipment) $20,000
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(cash) $30,000
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Adjusted basis
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$20,000
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$30,000
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Fair market value
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$25,000
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$30,000
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Consideration given
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50 shares
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50 shares
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Stock value received
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30,000
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30,000
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Received cash
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5,000
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0
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Voting shares
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50 shares
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50 shares
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• M&S Incorporated will manufacture 1,000 bulldozers during the year.
• The property that Mary will infuse into M&S Incorporated is one piece of equipment.
• Sarah will invest cash.
• All of the shares are voting shares.
Develop a thorough understanding of accounting standards and principles.
• Fulfill the core accounting educational requirement to sit for the CPA exam.
• Prepare to practice in public and private accounting position.
• Advance to a higher professional level.