Kevin Purchased 5,000 Shares of Purple Corporation Stock at $10

question 7

Multiple Choice

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

• A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
• B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
• C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
• D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.
• E) None of the above.

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Definitions:

Capital Balance

Represents the amount of funds contributed by investors or owners plus retained earnings in a company.

SEC

The U.S. Securities and Exchange Commission, a federal agency responsible for enforcing federal securities laws and regulating the securities industry.

Bonus

An additional payment or reward given to employees as an incentive or reward for performance.

Partnership

A form of business organization where two or more individuals agree to share the profits and losses of a business venture.