Walker Corporation issues one right to purchase one share of preferred stock at $90 for each ten shares of common stock owned by a shareholder.Seth owns 200 shares of common stock and receives 20 rights.The rights can be exercised anytime during the next 6 months.On the date of issuance of the stock rights, the common stock is selling for $14 per share and the rights are selling for $10 each.Seth has a total basis in the 200 common shares of $600 and elects to allocate basis to the rights.If Seth sells the 20 rights for $600 five months after they are received, what is his realized gain?

Question

Quizplus · Accepted Answer

Seth's basis in the rights is $40, calculated by allocating a portion of the basis in the common stock to the rights. The realized gain is the selling price of $600 minus the basis of $40, resulting in a gain of $560.

Walker Corporation Issues One Right to Purchase One Share of Preferred