Question

Terry owns Lakeside, Inc. stock (adjusted basis of $80,000), which she sells to her brother, Jake, for $64,000 (its fair market value). Eighteen months later, Jake sells the stock to Pamela, a friend, for $78,000 (its fair market value). What is Terry’s recognized loss, Jake’s recognized gain or loss, and Pamela’s adjusted basis for the stock?
​Terry's Recognized Loss Jake's Recognized Gain (Loss) Pamela's Basis
A. $ -0- $ -0- $78,000
B. $ -0- $14,000 $64,000
C. $ -0- $14,000 $78,000
D. $16,000 $14,000 $78,000
E. None of these.

Answer 1

Answer:

D. $16,000 $14,000 $78,000

Explanation:

Step 1: Determine Terry's adjusted basis

Terry's adjusted basis=$80,000

Step 2: Determine Terry's recognized loss

Terry's recognized loss=Terry's adjusted basis-fair market value at sale

where;

Terry's adjusted basis=$80,000

fair market value at sale=$64,000

replacing;

Terry's recognized loss=(80,000-64,000)=$16,000

Terry's recognized loss=$16,000

Step 3: Determine Jake's recognized gain

Jake's recognized gain=Fair market value at sale-Jake's adjusted basis

where;

Fair market value at sale=$78,000

Jake's adjusted basis=$64,000

replacing;

Jake's recognized gain=(78,000-64,000)=$14,000

Step 4: Determine Pamela's Basis

Pamela's Basis=fair market value at sale=$78,000