XYZ Corporation declares a 10 percent stock dividend distributable to all shareholders.There is only the one class of stock outstanding,and shareholders do not have any choices with respect to the distribution.Carol had owned 100 shares of stock,and she received 10 new shares as a result of the stock dividend.The stock is trading at $25 per share as of the distribution.Carol will recognize $250 of dividend income.

Question

Quizplus · Accepted Answer

Carol will not recognize $250 of dividend income. Instead, her cost basis in the stock will decrease to reflect the new shares received as part of the dividend. Assuming a cost basis of $25 per share prior to the dividend, her new cost basis after the dividend will be $22.73 per share ($2,500 divided by 110 shares).

XYZ Corporation Declares a 10 Percent Stock Dividend Distributable to All