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Problem 18-32 (LO. 1, 7)

Rhonda owns 50% of the stock of Peach Corporation. She and the other 50% shareholder, Rachel, have decided that additional contributions of capital are needed if Peach is to remain successful in its competitive industry. The two shareholders have agreed that Rhonda will contribute assets having a value of $200,000 (adjusted basis of $15,000) in exchange for additional shares of stock. After the transaction, Rhonda will hold 75% of Peach Corporation and Rachel's interest will fall to 25%.

a. What gain is realized on the transaction? $_______________

How much of the gain will be recognized? $_________________

b. Rhonda is not satisfied with the transaction as proposed. How will the consequences change if Rachel agrees to transfer $1,000 of cash in exchange for additional stock? In this case, Rhonda will own slightly less than 75% of Peach and Rachel's interest will be slightly more than 25%. _________________

Select the letter assigned to the statement that is correct.

a. The plan results in Rachel becoming a transferor of property along with Rhonda, so that together they meet the 80% control test. b. Since Rhonda is now part of a group that meets the control test, she would avoid recognizing the gain c. Rachel's interest cannot be counted, since the value of the stock she would receive is relatively small compared to the value of the stock she already owns.

c. If Rhonda still is not satisfied with the result, complete the statement below regarding what should be done to avoid any gain recognition.

Rhonda can transfer property that ________________ (HAS/HAS NOT) appreciated in value. Rachel could contribute property of an amount that______________ (IS/ IS NOT) small relative to the value of the stock already owned.

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