Ace Corporation Has a Single Class of Stock Outstanding

question 45

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 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?

---

Definitions:

Nonrival Goods

Goods whose consumption by one individual does not reduce availability to others, such as public parks or broadcast television.

Pay-per-view Television

A type of television service by which subscribers can purchase events to view via private telecast.

Free-rider Problem

The free-rider problem occurs when individuals benefit from resources, goods, or services without paying for them, leading to underprovision of those goods or services.

Public Good

A good that is non-excludable and non-rivalrous, meaning it can be used simultaneously by more than one person without reducing its availability to others.