JIM is acquiring all of the assets of Mason Machining, Inc. in a merger transaction. Mason transfers assets having a FMV of $1,775,000 and an adjusted basis of $995,000 and $200,000 in liabilities to JIM in exchange for $750,000 in cash and $800,000 of JIM's common stock.

Click here to view Mason's Acquisition Data.

• Explain what type of merger this is. JIM distributes its stock and cash to Mason in exchange for all of its assets.
• Calculate Mason's gain on this transaction.
• How much of this gain will Mason recognize?
• How must tax liability will Mason incur from this transfer?

Mason distributes the JIM stock and cash to its shareholders for all of their shares of Mason's stock. Shareholders' basis in this stock is $600,000.

• Calculate how much gain the Mason's shareholders will realize and recognize on this transfer.
• How must tax liability will Mason's shareholders incur from this transfer?
• Explain the tax implications for JIM.

Mason Machining, Inc. Acquisition Data Actual 2005 Actual 2006 Difference Balance Sheet Cash $165,000 $200,000 $35,000 Other Assets 1,500,000 1,575,000 75,000 Total Assets $1,665,000 $1,775,000 $110,000 $165,000 $225,000 $60,000 1,000,000 500,000 $1,665,000 1,000,000 550,000 $1,775,000 0 50,000 $50,000 $5,250,000 2,500,000 $2,750,000 $6,000,000 2,800,000 $3,200,000 $750,000 $300,000 $450,000 900,000 500,000 $1,350,000 950,000 500,000 $1,750,000 $50,000 $0 $400,000 $5,250,000 2,500,000 2,750,000 900,000 $1,850,000 $6,000,000 2,800,000 3,200,000 950,000 $2,250,000 $750,000 300,000 450,000 $50,000 $400,000 $28,000 3,000 240,000 $271,000 1,200,000 $1,471,000 $40,000 5,000 336,500 $381,500 1,080,000 $1,461,500 $5,000 $8,000 Liabilities Common Stock, $1 par Retained Earnings Total Liabilities & Equity Income Sales Variable Expenses Contribution Margin Less Fixed Expenses: Costs Depreciation Net Operating Income Cash Flow Sales Less Variable Expenses Contribution Margin Less Costs Net Annual Cash Inflow Assets Current Assets Cash Accounts Receivable Inventory Total Current Assets Plant Equipment Total Assets Current Liabilities Accounts Payable Equities $58,000 $76,000 8,000 9,000 468,400 380,000 $534,400 $383,500 960,000 960,000 $1,494,400 $1,343,500 $6,000 $5,000 Owners' Equity Retained Earnings Total Owners' Equity Total Liabilities $1,200,000 266,000 1,466,000 $1,471,000 $1,200,000 253,500 1,453,500 $1,461,500 $1,200,000 $1,200,000 288,400 138,500 1,488,400 1,338,500 $1,494,400 $1,343,500