Problem NO: 41

Rex and Felix are the sole shareholders of the Dogs and Cats Corporation (DCC). After several years of operations using the accrual method, they decid

Rex and Felix are the sole shareholders of the Dogs and Cats Corporation (DCC). After several years of operations using the accrual method, they decided to liquidate the corporation and operate the business as a partnership. Rex has a tax basis in his shares of $60,000 and Felix has a tax basis in his shares of $20,000. Rex and Felix hired a lawyer to draw up the legal papers to dissolve the corporation, but they need some tax advice from you, their trusted accountant. DCC’s tax accounting balance sheet at the date of liquidation is as follows: 

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AssetsTax BasisFMV

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Cash$30,000$30,000

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Accounts receivable 10,000 10,000

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Inventory 10,000 20,000

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Equipment 30,000 20,000

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Building 15,000 30,000

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Land   5,000   40,000

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    Total assets $100,000 $150,000

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Liabilities

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Accounts payable $5,000

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Mortgage payable - Building 10,000

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Mortgage payable - Land 10,000

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Total liabilities $25,000

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Stockholders’ Equity

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Common stock - Rex (80%)$100,000

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Common stock - Felix (20%) 25,000  

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Total shareholders’ equity$125,000

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Required:

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a) Compute the gain or loss recognized by Rex, Felix, and DCC on a complete liquidation of the corporation assuming each shareholder receives a pro rata distribution of the corporation’s assets and assumes a pro rata amount of the liabilities.

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