Ace Corporation Has a Single Class of Stock Outstanding

question 108

Essay

Ace Corporation has a single class of stock outstanding. Alan owns 200 shares of the common stock, which he purchased for $50 per share two years ago. On April 10, of the current year, Ace Corporation distributes to its shareholders one right to purchase a share of common stock at $60 per share for each share of common stock held. At the time of the distribution, the common stock is worth $75 per share, and the rights are worth $15 per right. On September 10, Alan sells 100 rights for $2,000 and exercises the remaining 100 rights. He sells 60 of the shares acquired with the rights for $80 each on November 10.
a)What is the amount and character of income Alan recognizes when he receives the rights?
b)What is the amount and character of gain or loss Alan recognizes when he sells the rights?
c)What is the amount and character of gain or loss Alan recognizes when he exercises the rights?
d)What is the amount and character of gain or loss Alan recognizes when he sells the new common stock?
e)What basis does Alan have in his remaining shares?

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Definitions:

Credit Policy

Guidelines that a company follows to determine credit terms for its customers, including payment deadlines, interest rates, and criteria for extending credit.

Marketable Securities

Marketable securities are liquid financial instruments that can be quickly converted into cash at market value, such as stocks, bonds, or treasury bills.

Financial Commitment

Obligations, typically in the form of debt or leases, that a company is legally required to fulfill in the future.

Seasonal Operations

Business activities that fluctuate according to the time of year, often due to changes in weather or consumer behavior.