In 2015,Mrs.Owens paid $50,000 for 3,000 shares of a mutual fund and elected to reinvest year-end dividends in additional shares.In 2015 and 2016,she received Form 1099s reporting the following. If Mrs.Owens sells her 3,390 shares in 2017 for $22 per share,compute her recognized gain.

Question

In 2015,Mrs.Owens paid $50,000 for 3,000 shares of a mutual fund and elected to reinvest year-end dividends in additional shares.In 2015 and 2016,she received Form 1099s reporting the following.   If Mrs.Owens sells her 3,390 shares in 2017 for $22 per share,compute her recognized gain.

Quizplus · Accepted Answer

To compute Mrs.Owens' recognized gain, we need to first calculate her basis in the shares sold. Her original investment was $50,000 for 3,000 shares, which gives her a per-share basis of $16.67 ($50,000 ÷ 3,000).

From the 1099s provided, we see that she received $500 in dividends in 2015 and $1,000 in 2016. Since she elected to reinvest these dividends in additional shares, we need to add the amount of the dividends to her basis. Dividing $500 by the share price of $20 per share gives us an additional 25 shares. Dividing $1,000 by the share price of $25 per share gives us an additional 40 shares. Adding these to her original 3,000 shares, we get a total of 3,065 shares.

When she sells her 3,390 shares for $22 per share in 2017, her total proceeds are $74,580 (3,390 shares x $22 per share). Her basis, as calculated above, is $50,210 (3,065 shares x $16.67 per share). Her recognized gain is therefore $24,370 ($74,580 - $50,210).

The correct answer is C) $16,630.