Question

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

(A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
(B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
(C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
(D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.

Answer 1

Answer:

so correct option is (B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain

Explanation:

given data

purchased = 5,000 shares

per share = $10

time = 2 year

common stock dividend = 5%

fair market value = $12.50 per share

solution

we know Purple basis before stock dividends will be

Purple basis before stock dividends =$5000 ×10

Purple basis before stock dividends =$50,000

and

stock dividends of 5 % is = 5000 × 5%

stock dividends = 250 shares

so

total shares after stock dividend is = 5000 + 250

total shares after stock dividend is = 5250

and

Purple basis per share after stock dividends will be

Purple basis per share after stock dividends  = $\frac{50000}{5250}$

Purple basis per share after stock dividends = $9.52

so gain recognized is  

gain recognized = 5000 × 10 - 9.52 × 5250

gain recognized = 50000-50000

gain recognized = 0

so correct option is (B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain