On January 1, 2014, XYC purchased 100 shares (1 percent) of AB common shares at $120 per share. XYC uses the cost method to account for the AB shares. Subsequent to purchase, the following transactions and events happened: June 1, 2014, received a 20 percent stock dividend on the AB shares; March 31, 2015, XYC sold half of the AB shares at $108 per share. At the date of the sale, XYC should recognize a gain (loss) on the sale of the AB shares of:

Question

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Initial purchase cost of 100 shares of AB shares = 100 x $120 = $12,000.

After receiving a 20% stock dividend, XYC would own 120 shares (100 + 20% of 100) with a cost basis of $12,000/120 = $100 per share.

When XYC sells half of the shares (i.e. 60 shares), its proceeds will be 60 x $108 = $6,480. The cost basis for the 60 shares sold will be 60 x $100 = $6,000.

Therefore, the gain on the sale of 60 shares will be $6,480 - $6,000 = $480.

On January 1, 2014, XYC Purchased 100 Shares (1 Percent)