Question

George bought the following amounts of Stock A over the years: (Loss amounts should be indicated with a minus sign.)

Date Purchased Number of Shares Adjusted Basis
Stock A 11/21/1994 1,090 $ 26,160
Stock A 3/18/2000 545 9,810
Stock A 5/22/2009 840 30,240
On October 12, 2020, he sold 1,335 of his shares of Stock A for $38 per share.
a. How much gain/loss will George have to recognize if he uses the FIFO method of accounting for the shares sold?

Answer 1

To calculate the gain/loss using the FIFO method, start with the oldest shares and work your way forward. For each set of shares, calculate the sales proceeds and subtract the adjusted basis to determine the gain/loss. Add up the gains and losses for each set of shares to get the total gain/loss. Using the FIFO method, George will recognize a gain of $14,760.

Step-by-step explanation:

To determine the gain/loss using the FIFO method, we need to start with the oldest shares and work our way forward. In this case, George bought 1,090 shares of stock on 11/21/1994, then 545 shares on 3/18/2000, and finally 840 shares on 5/22/2009.

1. If George sold 1,090 shares, we start with the shares bought on 11/21/1994. The adjusted basis for these shares is $26,160. The sales proceeds for these shares are calculated as: 1,090 shares * $38 per share = $41,420. Therefore, the gain/loss for these shares is: $41,420 - $26,160 = $15,260 gain.
2. Next, we move on to the shares bought on 3/18/2000. Since we haven't sold enough shares to get to these yet, we skip to the next set of shares.
3. Finally, we reach the shares bought on 5/22/2009. George sold 245 of these shares. The adjusted basis for these shares is $9,810. The sales proceeds for these shares are calculated as: 245 shares * $38 per share = $9,310. Therefore, the gain/loss for these shares is: $9,310 - $9,810 = -$500 loss.

To calculate the total gain/loss, we add up the gains and losses for each set of shares: $15,260 + (-$500) = $14,760 gain. Therefore, George will recognize a gain of $14,760 if he uses the FIFO method of accounting for the shares sold.