David owns 600 shares of K Corporation stock when K is merged into Parent Corporation.David receives 500 shares of Parent Corporation stock (fair market value = $10,500) and $500 cash in exchange for his K Corporation stock.David's K stock had a basis of $8,000 and an $11,000 fair market value.What is David's realized and recognized gain, respectively?
A)$3,000 and $3,000
B) $3,000 and $2,500
C)$2,500 and $500
D)$3,000 and $500

Question

David owns 600 shares of K Corporation stock when K is merged into Parent Corporation.David receives 500 shares of Parent Corporation stock (fair market value = $10,500) and $500 cash in exchange for his K Corporation stock.David's K stock had a basis of $8,000 and an $11,000 fair market value.What is David's realized and recognized gain, respectively?
A)$3,000 and $3,000 
B) $3,000 and $2,500
C)$2,500 and $500
D)$3,000 and $500

Quizplus · Accepted Answer

David's realized gain is the difference between the fair market value of what he received ($10,500 in stock + $500 in cash = $11,000) and his basis in the K Corporation stock ($8,000), which is $3,000. However, under the tax code, when a shareholder receives both stock (considered to be a like-kind exchange) and some cash (often referred to as "boot") in a corporate merger, the recognized gain is limited to the lesser of the realized gain or the boot received. Since David received $500 in cash, his recognized gain is $500.

David Owns 600 Shares of K Corporation Stock When K