Bob exchanges 4,000 shares of Beetle Corporation stock that he had purchased for $800,000 for 6,000 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 find Bob's recognized gain on the exchange, we need to calculate the realized gain first.

Realized gain = Fair market value of Butterfly stock - Adjusted basis of Beetle stock
Realized gain = $1,000,000 - $800,000
Realized gain = $200,000

Since Bob exchanged the Beetle stock for Butterfly stock in a like-kind exchange, the realized gain is not recognized for tax purposes. Therefore, Bob's recognized gain on the exchange is $0.

To find Bob's basis in the Butterfly stock, we need to use the following formula:

Basis in Butterfly stock = (Fair market value of Butterfly stock received / Total fair market value of all property transferred) x Adjusted basis of all property transferred

Basis in Butterfly stock = ($1,000,000 / ($1,000,000 + $0)) x $800,000
Basis in Butterfly stock = ($1,000,000 / $1,000,000) x $800,000
Basis in Butterfly stock = $800,000

Therefore, Bob's recognized gain on the exchange is $0, and his basis in the Butterfly stock is $800,000. Choice B is the correct answer.

Bob Exchanges 4,000 Shares of Beetle Corporation Stock That He