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 stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

Question

Quizplus · Accepted Answer

The correct answer is B because when Kevin receives a 5% stock dividend, the total basis of his investment remains the same ($50,000), but it is now spread over more shares (5,250 shares), resulting in a lower per share basis ($50,000 / 5,250 = $9.52). There is no recognized gain upon receipt of a stock dividend as it is essentially a reallocation of the basis among a greater number of shares.

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