What are the tax consequences to Euclid from the following independent events? I

Question

What are the tax consequences to Euclid from the following independent events?

In your computations, do not round intermediate division. If required, round the per share answer to two decimal places. Round all other answers to the nearest dollar.

a. Euclid bought 500 shares of common stock five years ago for $68,000. This year, Euclid receives 20 shares of common stock as a nontaxable stock dividend.

As a result of the stock dividend, Euclid's per share basis is $ _______________

b. Assume instead that Euclid received a nontaxable preferred stock dividend of 20 shares. The preferred stock has a fair market value of $6,800, and the common stock, on which the preferred is distributed, has a fair market value of $102,000. Do not round intermediate division.

After the receipt of the stock dividend, the basis of the preferred stock is $____________, and the basis of the common stock is $_____________.

Explanation / Answer

a. Cost per share = $68,000/500

= $136 per share

Now after the receipt of stock dividend of 20 shares, Euclid's base of common stock would incraese to 520.

Hence, after the recipt of stock dividend, Euclid's per share basis is = $68,000/520

=130.77 per share

b. If Euclid receives non-taxable preferred stock dividend of 20 shares with a fair market value of $6,800

The basis of the preferred stock would be = $6,800/20

=$340 per share

The basis of the common stock would be = $102,000/500

= $204 per share

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