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:

Economic Activity

The production, distribution, and consumption of goods and services in an economy.

Benefits

Advantages or monetary assistance received from employment, government, or insurance.

Economic Thinking

The process of evaluating decisions based on costs, benefits, and the impact on resource allocation.

Human Action

The study of human behaviour, particularly in the context of individuals' decisions and actions in the economy.