Renee, the Sole Shareholder of Indigo Corporation, Sold Her Stock

question 103

Multiple Choice

Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee's stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale and Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P and current E & P (before distributions) was $90,000. Which of the following statements is correct?

• A) Renee recognizes a $60,000 gain on the sale of the stock.
• B) Renee recognizes a $64,000 gain on the sale of the stock.
• C) Chad recognizes dividend income of $120,000.
• D) Chad recognizes dividend income of $30,000.
• E) None of these.

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Definitions:

Allowance Method

An accounting technique that estimates and sets aside a portion of accounts receivable deemed likely uncollectible.

Uncollectible Receivables

Accounts receivable that the company does not expect to collect, often recognized as bad debt expense.

Settlement

The process of finalizing a transaction where the buyer pays the seller, and the seller transfers ownership of an asset, or the resolution of a dispute.

Maturity Value

The amount that will be paid to the holder of a financial instrument at the instrument's maturity date, including principal and any accrued interest.