Bob exchanges 4000 shares of Beetle Corporation stock that he had purchased for $800,000 for 6000 shares of Butterfly Corporation common stock with a fair market value of $1,000,000. What is Bob's recognized gain on the exchange and his basis in the Butterfly stock?

Question

Quizplus · Accepted Answer

To calculate Bob's recognized gain on the exchange, we need to compare the fair market value of the Butterfly stock he received ($1,000,000) to the adjusted basis of the Beetle stock he gave up.

Bob's adjusted basis in the Beetle stock is the amount he paid for it ($800,000) plus any transaction costs, such as brokerage fees.

We don't have any information about transaction costs, so we'll assume they're negligible. That means Bob's adjusted basis in the Beetle stock is $800,000.

Since the fair market value of the Butterfly stock he received ($1,000,000) is greater than the adjusted basis of the Beetle stock he gave up ($800,000), Bob has a recognized gain on the exchange of $1,000,000 - $800,000 = $200,000.

Bob's basis in the Butterfly stock he received is equal to the adjusted basis of the Beetle stock he gave up ($800,000) plus the recognized gain on the exchange ($200,000). That means his basis in the Butterfly stock is $1,000,000.

Therefore, the correct answer is B) 11eac5ad_18c9_be18_888f_2b388f514116_TB2921_00.

Bob Exchanges 4000 Shares of Beetle Corporation Stock That He