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 determine the recognized gain on the exchange, we need to find the realized value of the Beetle Corporation stock and subtract the basis of the stock. The realized value is the fair market value of the Butterfly Corporation stock received in exchange, which is $1,000,000. The basis of the Beetle stock is $800,000. Therefore, the recognized gain on the exchange is $200,000.

To determine the basis in the Butterfly Corporation stock, we need to allocate the basis of the Beetle Corporation stock between the Beetle stock exchanged and the Butterfly stock received. We can do this by using the following formula:

Basis in Butterfly stock = (Realized value of Butterfly stock / Realized value of all stock) x Basis of all stock

Plugging in the numbers, we get:

Basis in Butterfly stock = ($1,000,000 / $1,200,000) x $800,000
Basis in Butterfly stock = $666,667

Therefore, Bob's recognized gain on the exchange is $200,000, and his basis in the Butterfly stock is $666,667. Choice B is the correct answer.

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