Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two y

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.

Explanation / Answer

option b) is correct

$50000 basis in the stock , $9.52 basis per share , $0 recognized gain.

Explanation

Purple basis before stock dividends =$5000*10=$50,000

5 percent of stock dividends = 5000shares *5/100= 250 shares

So total shares after stock dividend =5000+250=5250

Purple basis per share after stock dividends = $50000/5250= $9.52

So gain recognized is $0 (5000*10-9.52*5250) =50000-50000)

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