Problem 836 LO 6 WhaleCo acquired all of the common stock of

Problem 8-36 (LO. 6) WhaleCo acquired all of the common stock of MinnowCo early in year 1 for $900,000, and MinnowCo immediately elected to join WhaleCo\'s consolidated Federal income tax return. As part of the takeover, WhaleCo also acquired $300,000 of MinnowCo bonds. The results of MinnowCo for the first few years of the group operations were reported as follows: Determine WhaleCo\'s basis in its MinnowCo common stock as of the end of each tax year: If an amount is zero, enter \"O\". Operating Gain or Loss Tax Year Stock Basis Excess Loss 100,000 X $100,000 (800,000) (600,000) 0 2 800,000 X 0 0 500,000 X

Solution

1. Stock basis will increase with increase in income, thus stock basis at the end of year one would be $ 1,000,000

2. Stock basis will decrease with decrease in income, thus stock basis would be $ 2,000,000

3. Stock basis cannot be negative so when there is loss of $ 600,000 it will be Zero only. Excess loss would be $ 4,00,000

takeover of bonds will have no effect on common stock