CH 7 Mastery

Problem 7-22 (a) (LO. 2)

Cardinal Corporation was created six years ago through contributions from Kayla ($800,000) and Felix ($200,000). In a transaction qualifying as a reorganization, Cardinal exchanges all of its assets currently valued at $2,000,000 (basis of $1,400,000) for Spark Corporation stock valued at $1,800,000 plus $200,000 in Spark bonds. Cardinal distributes the Spark stock and bonds proportionately to Felix and Kayla in exchange for their stock in Cardinal. Cardinal's current and accumulated E & P before the reorganization amounts to $80,000.

If an amount is zero, enter "0".

a.Complete the computations below for Kayla and Felix regarding this transaction.

Kayla: Realized Recognized Postponed Basis In

Gain/Loss Gain/Loss Gain/Loss Stock

$1,600,000 $ $ $

$800, 000 Bond $ $

$2,400,000 $ $ $

Felix: Realized Recognized Postponed Basis In

Gain/Loss Gain/Loss Gain/Loss Stock

$400,000 $ $ $

$ Bond $ $

$ $ $ $

How do Kayla and Felix treat this transaction for income tax purposes?

Kayla:

Ordinary income: $

Dividend income: $

Capital gain income: $

Felix:

Ordinary income: $

Dividend income: $

Capital gain income: $

Generally, the shareholders of corporations involved in a tax-free reorganization do not recognize gain or loss when exchanging their stock, unless they receive cash or other property in addition to stock.

b.Complete the statement below regarding how Cardinal and Spark should treat this transaction, including Spark's basis in the assets it receives from Cardinal.

Cardinal recognizes $ gain or loss on the reorganization. Spark's basis in the Cardinal assets is a carryover basis of $ .