Tobi Schmidt and Nik Rowe are unrelated acquaintances.Tobi owns 100% of the shares of Sun Co., and Nik owns 100% of the shares of Moon Co.Nik would like to sell all of the shares of Moon Co.to Sun Co.The shares have a cost base of $50,000 and a market value of $250,000.Nik and Tobi are meeting with an advisor to structure the sale in a manner that will defer any taxes at this time.Nik would like to take as large a note receivable as possible in the sale.Which of the following statements is correct pertaining to the sale of Moon Co.to Sun Co.?
A)Nik will receive a note receivable from Sun Co.for $250,000.
B)Nik will receive a note receivable from Moon Co.for $250,000.
C)Nik will receive shares in Sun Co.valued at $200,000 and a note receivable for $50,000.
D)Nik will receive shares in Sun Co.valued at $50,000 and a note receivable for $200,000.

Question

Quizplus · Accepted Answer

Since Nik is selling all of the shares of Moon Co. to Sun Co., it is likely that the sale will be structured as a share purchase agreement. If the purchase price is $250,000 (the market value) and Nik would like to take as large a note receivable as possible, then it is likely that the agreed-upon price will be split between cash and a note receivable. Sun Co. would pay for the cash portion of the purchase price with its own funds, and would give Nik a note receivable for the remaining balance. Since Nik owns all of the shares of Moon Co., he would receive the cash and the note receivable directly, not through Moon Co. Therefore, answer choice C is the best choice. Nik would receive shares in Sun Co. valued at $200,000 (the cash portion of the purchase price) and a note receivable for $50,000 (the remaining balance).

Tobi Schmidt and Nik Rowe Are Unrelated Acquaintances