Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?
A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.
E) None of the above.

Question

Quizplus · Accepted Answer

Kevin's original basis in the stock is $50,000 (5,000 shares x $10). A 5% stock dividend means he receives 250 additional shares (5,000 x 0.05). The total number of shares is now 5,250. The basis per share is recalculated as $50,000 / 5,250 = $9.52. No gain is recognized on the receipt of a stock dividend.

Kevin Purchased 5,000 Shares of Purple Corporation Stock at $10