Ace Corporation Has a Single Class of Stock Outstanding

question 108

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 shares 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?

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Definitions:

Dependent Variable

In an experiment, the variable that is measured or tested and is expected to change as a result of manipulations to the independent variable.

Interrelated Ideas

Concepts or thoughts that are connected in such a way that they influence or impact each other.

Observations

The action or process of closely monitoring or noting phenomena or data for the purpose of scientific inquiry or gathering information.

Theory

A set of concepts designed to elucidate a particular subject, founded on overarching principles unrelated to the subject matter itself.