YEAR OF FORMATION AND BACKGROUND
Simon and Theodore are father and son and prior to 2019 have each been operating reasonably successful businesses independent of each other. In late 2018, they agreed that their individual strengths would be more successful if they combined their businesses and have been formulating a plan to bring their businesses together as a single entity. They have been operating their businesses as separate sole proprietorships but now want to both put them together and obtain some legal liability protection.
Alvin is Theodore’s best friend since grade school. Alvin would like to participate in the new business venture but has limited cash to contribute. He has offered to do all the start-up accounting work in exchange for a portion of the new business. Even though Simon is not sure about Alvin’s work ethic, he agrees to let Alvin become part of the new business.
The assets and liabilities they each contribute are included in the separate excel spreadsheet “Contribution in 2019”.
On February 1, 2019, the contributions are finally completed and all of the legal agreements signed by all of the parties. Simon contributed his existing business, with the exception of the land and building he owns where the business will be operated. Theodore contributed all of his business assets and liabilities. Alvin contributed a little bit of cash. His services to be provided were valued at $100,000. The lawyers who did all of the legal work agreed to accept stock in the new entity in addition to some cash. The lawyers were paid $20,000 in cash and received stock valued at $50,000. The new entity was formed in January 2019 in anticipation of the contributions by each party. The debt contributed by Simon was borrowed from the bank in December 2018 and the cash was used by Simon to remodel his house. The debt was secured by property that was eventually contributed to AST, not by Simon’s house. The liabilities contributed by Theodore were fully related to the business.
Alvin turns out to be a pretty good financial accountant and has completed the necessary trial balances as of the end of the years. You have had a number of discussions with Alvin and have found out the following information about the business. The name of the company is AST Records, Inc. The business is manufacturing vinyl records for various recording artists. As a part of the business, the company not only manufactures the vinyl albums but also does the art work for the album cover. Alvin has chosen the accrual method for book purposes and sees no reason why the tax returns should be anything different. Inventory is a significant part of the revenue production process. Since the entity was just formed at the beginning of 2019, there were no reserves or other accruals as of the start date of February 1, 2019. Because the company has turned out to be more successful than they ever planned, there is a significant amount of cash on the balance sheet at the end of the year. Simon has taken some of the extra cash and made investments in various stocks (other than DaveCo, all are less than 20% ownership of the stock investment) and bonds to provide at least some interest and dividend income. All of th
