Question

In January Year 1, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, Year 3, Orban distributed one share of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, Year 3, Joan’s one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. After the distribution of the preferred stock, Joan’s bases for her Orban stocks are

Answer 1

The distribution of the preferred stock, Joan’s bases for her Orban stocks are 225 common stock and 75 preferred stock

Step-by-step explanation:

In this question, we use the proportionate method which is shown below.

As we know,

The total stock value is $300, and the fair value of the common stock & preferred stock is $450 and $150 respectively.

So, the basis of the common stock would be

= Total stock value × (fair value of the common stock ÷ total fair value of the stock)

= $300 × ($450 ÷ $600)

= 225

And, the basis of the preferred stock would be

= Total stock value × (fair value of the preferred stock ÷ total fair value of the stock)

= $300 × ($150 ÷ $600)

= 75

The total stock equal to

= Fair value of the common stock + fair value of the preferred stock

= $450 + $150

= $600