Essay Advanced Accounting Case 1

As for the combination of cash and new shares, shareholders can take part of their money

4. Who are the stakeholders in this situation and what, if any, obligations do they have?

In the above question [question 1] Fred Smart was the auditor of Photolab Ltd. Fred Smart’s wife owns 10% of the shares in Photolab Ltd. When Fred is conducting the audit he is concerned about the company’s accounts, in that the company has not kept proper financial records. He also cannot find any evidence that the company has maintained a register of its members or its charges. Tom tells him he will find them and give them to him but never does. The company tells Fred Smart that it intends to show his report to BigBank, as they wish to borrow $100,000 for expansion purposes. The company

T, an individual taxpayer, plans to incorporate his farming and ranching activities, currently operated as a sole proprietorship. His primary purpose of incorporating is to transfer a portion of his ownership in land to his son and daughter. T believes that gifts of stock rather than land will keep his business intact. Included in the property he plans to transfer is machinery purchased two years earlier.

The court may pierce the corporate veil when there is an implied agency relationship inside the corporate groups. By applying the 6 point test from SSK case in an orderly manner, Casino Ltd. may have argued that the profits earned by Caterers Ltd. are separate from them, given that distribution was made in the form of dividends. However, in reality the profits belong to Casino Ltd. This is because all the profits are given to them and Caterers Ltd. gets nothing. This means that the first criterion is satisfied. Additionally, since all the

Section 351(c)(2) allows shareholders to dispose of all or part of the transfers stock without preventing the corporations Section 351 transaction from satisfying the “ control immediate after” requirement (4). Section 351(d) states that there are times when services, certain indebtedness, and accrued interest not treated as property as per James v. Commissioner, 53 T.C. 63 (1969); cf. Hospital Corporation of America v. Commissioner, 81 T.C. 520

Potentially two layers of Tax: Corporate layer – Target recognizes a taxable gain or loss on the sale of assets. Shareholder layer – Selling shareholders recognize a gain taxed as ordinary income if the target liquidates equal to the after-tax liquidating dividend less shareholders’ basis in the stock. The acquirer assumes a stepped-up (FV) basis in the target’s net assets. The acquirer allocates the purchase price to the acquired assets and liabilities for tax purposes in the same manner as it does for accounting purposes. The depreciation and amortization of all asset write-ups and intangibles recognized in the transaction, including goodwill, are tax-deductible. The target’s tax attributes, such as non-operating losses (NOLs), may be used immediately to offset the target’s taxable gain. Any remaining tax attributes are lost if the target liquidates. An acquisition of a freestanding C corporation will usually be structured as a purchase of stock because an asset purchase usually results in double taxation (i.e. the seller is taxed on the sale of assets, and the seller’s shareholders are taxed on any after-tax proceeds from the sale distributed by the seller).

The decision to establish the subsidiary as a corporation is based on several factors. Because a change in entity is required, the resulting adjustments to prior and current financial statements may have a positive effect on users of this information. Tax advantages may occur and the consolidated financial statements of the parent corporation may also experience a positive boost. The addition of accounting categories for capital stock, additional paid-in capital, and retained

Under certain circumstances, ASC 830 obligates that equity must be switched to net income. According to ASC 830-40-1, the circumstances that require this reclassification are “upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity.” Therefore, when dissolving any foreign operation, it is essential to determine if that foreign entity makes up its own foreign entity or is a part of a different overall foreign entity.

“The total equity investment (equity investments in a legal entity are interests that are required to be reported as equity in that entity’s financial statements) at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders.”

Due to the information, 20 acres of land equal 80 sheep according to the exchange rate of last year, a one-room cabin equal 3 acres of land and equal 12 sheep finally, a plow equals 2 goat and equal 2/3 sheep according to last year’s exchange rate and 2 carts which were traded with a poor acre of land equals 8 sheep plus 400 sheep. So Deyonne’s total assets are 500(2/3) sheep. Deyonne’s liabilities and assets deduction are 35 sheep plus 3 sheep, which will come to 38 sheep,

Colson, Inc. is a successful company with eight shareholders, six of which are individuals and two which are family limited partnerships. None of these shareholders are related and only one of them currently works for the company. The shareholders have become frustrated with the double taxation imposed upon them by the company’s C corporation status and would like to explore the potential of converting to a pass-through entity such as an S corporation or LLC. They have asked our firm to advise them on this possibility.

Under this plan, the target company issues rights to its stockholders in the form of a dividend. When an acquirer purchases a specified percentage ownership in the target company, the target shareholders, excluding the acquirer, are entitled to sell their common stock back to the company for a specified sum of cash, debt securities, preferred stock, or some combination thereof. This form of poison pill strategy is rarely used by the U.S. corporations.

Q.2) Explain why it is necessary to identify who is the acquirer in a business combination?

The dissolution of all but one of the separate legal entities is not necessary for a business combination. An example of one form of business combination in which the separate legal