On January 30, Juan Receives a Nontaxable Distribution of Stock

question 39

Multiple Choice

On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share) . On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?

• A) $1,200
• B) $533
• C) $400
• D) $0
• E) None of the above

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Definitions:

Bond Issue

A bond issue refers to the process by which a corporation or government raises funds by issuing bonds to investors, which are debt securities promising to repay the principal along with interest.

Bond Discount

The difference between the bond's face value and its selling price when the bond is sold for less than its face value.

Premium on Bonds

The amount by which the price paid for a bond exceeds its face value, typically because the interest rate it pays is higher than the market rate.

Maturity

The date on which a debt or other borrowing is due to be repaid in full, or when an investment reaches its full value.