Question

Ms. Pear owned 1,000 shares of YZ Corporation which she had purchased in Year 1 at a cost of $12 per share. In Year 3, she received a nontaxable 20% stock dividend. The shares were identical to those she already held. She ended the year owning 1,200 shares. In Year 5, the stock split 2 for 1 which increased her holdings to 2,400 shares at the end of the year. In Year 8, she sold 400 shares. What was her basis in the 400 shares of stock sold?

Answer 1

$2,000

Step-by-step explanation:

Ms. Pear invested $12,000 in 1,000 shares of YZ Corporation. After the dividends she received and the stock split, she ended with 2,400 shares. Since she sold 400 shares, it represents 16.67% of her total shares (= 400 / 2,400). To determine the basis for the 400 shares she sold all we need to do is multiply 16.67% x $12,000 (initial investment) = $2,000