El Toro Corporation Declared a Common Stock Distribution to All

question 111

Multiple Choice

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30,year 1.Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own.Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share.The fair market value of the El Toro stock was $100 per share on June 30,year 1.What are the tax consequences of the stock distribution to Raoul?

• A)$0 dividend income and a tax basis in the new stock of $100 per share.
• B)$0 dividend income and a tax basis in the new stock of $60 per share.
• C)$0 dividend income and a tax basis in the new stock of $40 per share.
• D)$15,000 dividend and a tax basis in the new stock of $100 per share.

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Definitions:

Discount Rate

An interest rate that the Federal Reserve charges banks for short-term loans, influencing economic activity by setting the cost of borrowing money.

Cash Discounts

A reduction in the invoice price offered by sellers to buyers for prompt payment of their bill.

Interest Days

The number of days over which interest is calculated on a loan or investment.

Non-Interest-Bearing Note

A financial instrument that does not accrue interest over time, meaning the borrower pays back only the principal amount borrowed.