Melissa owns 40,000 shares of Wilkerson Corporation common stock that cost $99,000 four years ago. During the current year, Wilkerson distributes a 10% stock dividend to shareholders. Melissa receives 4,000 new shares when the market value of the stock is $9 per share. Later in the year, the corporation distributes a cash dividend of $0.50 per share. What are the tax effects of these distributions to Melissa?
I.The $22,000 cash dividend is included in gross income.
II.The $36,000 stock dividend is included in gross income.
III.Only $20,000 of the cash dividend is included in gross income.
IV.At the end of the year, the per share basis in the stock is $2.25.

Question

Melissa owns 40,000 shares of Wilkerson Corporation common stock that cost $99,000 four years ago. During the current year, Wilkerson distributes a 10% stock dividend to shareholders. Melissa receives 4,000 new shares when the market value of the stock is $9 per share. Later in the year, the corporation distributes a cash dividend of $0.50 per share. What are the tax effects of these distributions to Melissa?
I.The $22,000 cash dividend is included in gross income.
II.The $36,000 stock dividend is included in gross income.
III.Only $20,000 of the cash dividend is included in gross income.
IV.At the end of the year, the per share basis in the stock is $2.25.
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Quizplus · Accepted Answer

Statement I is correct as cash dividends are taxable income for the recipient in the year they are received.

Statement IV is correct as the per share basis in the stock is adjusted with the stock dividend received. To calculate the new basis, divide the original basis by the total number of shares owned and then multiply by the new total number of shares.

Melissa's original investment of $99,000 is equivalent to a per-share basis of $2.475 ($99,000 ÷ 40,000 shares). After receiving the 10% stock dividend of 4,000 shares, Melissa now owns 44,000 shares. To calculate the new per-share basis, divide the original basis of $99,000 by the new total of 44,000 shares, resulting in a new per-share basis of $2.25.

Statement II is incorrect as stock dividends are not taxable income until the shares are sold.

Statement III is incorrect as the entire cash dividend of $22,000 is included in gross income, not just $20,000.

Melissa Owns 40,000 Shares of Wilkerson Corporation Common Stock That