Question

Penny owned 2,000 shares of Dollar Inc. common stock that were purchased in Year 1 at...

Penny owned 2,000 shares of Dollar Inc. common stock that were purchased in Year 1 at $10.50 per share. Penny received a 5% non-taxable dividend of Dollar common stock in Year 2. In Year 5, the stock split 2 for 1. In the current year Penny sold 800 shares. What is Penny s basis in the 800 shares sold?

$4,000

$8,000

$8,400

$16,800

$21,000
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Answer #1

Option A is correct $4000

Assumimg share book value =$10

Therefore non taxable dividend will be $0.5ie 5% of $10

Therefore value of 2000 shares before split become

=2000x($10)

=$20000

Now shares are split in to 2 for 1 that means now shares are 2000x2=4000 shares

Value for 1 share after split

=$20,000/4000 shares =$5 per share

Value of 800 shares =$5x800=$4000

Note:-Non taxable dividend are not taxable in same year rather they get deducted from cost basis.

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