Stanley Steamer Purchased 1,000 Shares of Patrick Corporation Common Stock

question 39

Essay

Stanley Steamer purchased 1,000 shares of Patrick Corporation common stock at $6 per share in 2008. On September 26, 2012, he received 1,000 nontaxable stock rights entitling him to buy 200 additional shares of Patrick Corporation common stock at $10 per share. On the day that the rights were issued, the fair market value of the stock was $12.50 per share ex-rights and that of the rights was $2.50 each. Stanley sold 500 of the rights for $1,100 on October 24, 2012, and let the other 500 rights expire.
(a.) What is the gain or loss that Stanley should report in 2012?
(b.) What gain or loss should Stanley report if the value of the rights were $1.25 instead of $2.50?

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Definitions:

Machine Hours

A measure of production time used in cost accounting to allocate costs to products or services based on the time they spend being processed on a machine.

Factory Overhead

All indirect costs associated with manufacturing, excluding direct materials and direct labor, such as utilities, depreciation, and maintenance of equipment.

First-in, First-out Method

An inventory valuation method where goods first received are the first ones sold, assuming that inventory costs rise over time.

Conversion Costs

The costs incurred to convert raw materials into finished products, including labor and overhead.