Parchment, Inc., is created with the following asset and liability contributions.

Jake and Fran each receive 100 shares of Parchment common stock.

Shareholder Assets Basis Fair Market Value

Jake Cash $100,000 $100,000

Fran Land 40,000 120,000*

*The land is subject to a mortgage of $20,000 that Parchment assumes.

Prepare a financial accounting balance sheet for Parchment. Discuss the relevance of conduit theory and entity theory in the creation of Parchment.

Prepare a tax balance sheet for Parchment. Discuss the relevance of conduit theory and entity theory in the creation of Parchment.

Assume that Parchment sells the land for $150,000 four months after Parchment was created. Discuss the effect of the sale on the financial accounting balance sheet and the tax balance sheet.