LO.2, 3, 4 Lori was engaged in a service business as a sole proprietor and reported her income on the cash basis. On February 1, 2010, she incorporates the business. In exchange for all of the assets and liabilities of her business, Lori obtains all of the stock of newly formed Green Corporation. Included in the transfer are the unrealized receivables and payables of the business. The balance sheet of Green immediately following its formation is as follows:

Green Corporation Balance Sheet February 1, 2010 Assets Basis to Green Fair Market Value Cash $ 80,000 $ 80,000 Unrealized accounts receivable 0 240,000 Equipment (cost $180,000; depreciation claimed $60,000) 120,000 320,000 Building (straight-line depreciation) 160,000 400,000 Land 40,000 160,000 Total $400,000 $1,200,000 Liabilities and Stockholder’s Equity Liabilities:

Accounts payable—trade $ 120,000 Notes payable—bank 360,000 Stockholder’s equity:

Common stock 720,000 Total $1,200,000 Discuss the tax consequences of the incorporation to Lori and to Green Corporation.