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

question 112

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, while 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, while 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 the above.

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Definitions:

Deadweight Loss

An inefficiency in the market where the total surplus of producer and consumer is not maximized due to factors like taxes or subsidies.

Elastic Demand

A situation where the quantity demanded of a good or service significantly changes in response to a change in price.

Equilibrium Price

The price at which the quantity of a product offered is equal to the quantity of the product in demand.

Tax Placed

The imposition of a financial charge or levy on an individual or a corporation by a government.