Question

Luana pays $40 per share for 100 shares of Manano Corporation common stock. At the end of the year, the market price of the stock is $60 per share. During the year, she receives a cash dividend of $4 per share. Manano reports that $3 per share is taxable and $1 per share is a nontaxable dividend. What are the tax effects of these events?

Answer 1

there is capital recovery of share by $1

Step-by-step explanation:

given data

share = 100

pays = $40 per share

market price = $60 per share

dividend = $4 per share

taxable = $3 per share

nontaxable dividend = $1 per share

to find out

tax effects of these events

solution

we know that Reported as gross income and does not effect basis of stock i.e $3

and basis of the stock is reduces by non taxable dividend that is also excluded from the gross income that is

gross income = $1 × 100 share

gross income = $100

so that

finally the adjusted basis in stock is $40 - $1

adjusted basis in stock is $39

so that It is reduced because

there is capital recovery of share by $1