Question

Sammy buys a 20% interest in Duvall Corporation paying $100,000 cash on January 1, 2014. During...

Sammy buys a 20% interest in Duvall Corporation paying $100,000 cash on January 1, 2014. During 2014, Duvall Corporation reports a loss of $60,000 and pays cash dividends to shareholders of $5,000. For 2015, Duvall Corporation has income of $200,000 and pays cash dividends of $40,000. If Duvall Company is organized as an S Corporation, Sammy's basis in the Duvall Corporation stock at the end of 2015 is:

a.

$88,000

b.

$89,000

c.

$100,000

d.

$119,000

e.

$128,000

According to the test bank 2016, the answer is (d) $119000. Please explain how to calculate this. Thank you!

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Answer #1

Sammy buy @ 20% interest at $ 100000

in 2014 there is loss of $ 60000 as sammy has 20% share so this will be $60000*20% = $ 12000 let decrease in stock price.

in 2015 there is profit of $ 200000 , sammy stock will increase by $200000*20% = $40000

So net effect will be $40000-$12000 = $ 28000 stock price increase

Further total dividend given - 2014 - $ 5000

2015 - $ 40000

Sammy Share = ( 5000 + 40000 ) * 20% = $ 9000

Dividend declaration will decrease stock price.

So stock at 2015 end will be = $ 100000 + $28000 - $ 9000 = $ 119000

Hope this will be clear.

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