Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Compute Loonis and Rhea's realized and recognized gain on the exchange.

Question

Quizplus · Accepted Answer

Realized gain for both Loonis and Rhea can be computed by subtracting their adjusted tax basis from the fair market value of the assets they contributed. 
Realized gain for Loonis = $820,000 - $444,000 = $376,000
Realized gain for Rhea = $180,000 - $75,000 = $105,000 
Since both Loonis and Rhea received stock in exchange for their assets, they are not required to recognize any gain or loss on the exchange (as long as certain conditions are met). Therefore, both Loonis and Rhea recognized no gain.