Asity Corporation is interested in acquiring the majority of Pitta Corporation's assets. Pitta's assets are currently valued at $950,000, and its liabilities are $250,000. However, there is one operating division of Pitta in which Asity is not interested. Since Pitta desires to be taken over by Asity, Pitta first sells the unwanted division for its net fair market value of $250,000 ($350,000 FMV assets - $100,000 liabilities). Pitta then transfers its remaining assets and liabilities to Asity for $450,000 in common voting stock. Which of the following statements is correct with regard to the proposed restructuring?
A)Continuity of interest does not exist for the Pitta shareholders.
B)The continuity of business enterprise test is failed.
C)There is no sound business purpose for this restructuring.
D)The step transaction can be applied to this transaction.
E)All of the above statements are true.

Question

Quizplus · Accepted Answer

The step transaction can be applied to this transaction because the sale of the unwanted division and the transfer of the remaining assets and liabilities to Asity are part of a single integrated plan to acquire the majority of Pitta's assets.

Asity Corporation Is Interested in Acquiring the Majority of Pitta