Question

Bob exchanges 4,000 shares of Beetle Corporation stock that he had purchased for $800,000 for 6,000 shares of Butterfly Corporation common stock with a fair market value of $1,000,000. What is Bob’s recognized gain on the exchange and his basis in the Butterfly stock?

= Fair market value (Amount realized) of/in stock – Adjusted cost basis of/in stock = Realized gain/loss (or capital gain/loss) of/in stock= $1,000,000 - $800,000= $200,000. Recognized Gain Adjusted cost basis $0 $800,000. In the exchange of property exclusively for stock in another corporation, Beetle Corporation realizes a $200,000 gain ($1,000,000 amount realized - $800,000 adjusted cost basis (or basis, adjusted basis)). Because Beetle Corporation received no noncash boot property, however, it recognizes none of the gain or $0 gain or $0 capital gain.

What was done mathematically to get the $0.00 or $0 capital gain?
a) Added the adjusted cost basis to the fair market value
b) Subtracted the fair market value from the adjusted cost basis
c) Multiplied the fair market value by the adjusted cost basis
d) Divided the adjusted cost basis by the fair market value

Answer 1

The recognized gain of $0.00 or $0 capital gain was determined by subtracting the adjusted cost basis of $800,000 from the fair market value of $1,000,000.

Step-by-step explanation:

The calculation for recognized gain involves subtracting the adjusted cost basis of the exchanged property from the fair market value of the property received. In this case, the fair market value of the Butterfly Corporation stock received was $1,000,000, while Bob's adjusted cost basis in the Beetle Corporation stock was $800,000.

By subtracting the adjusted cost basis from the fair market value ($1,000,000 - $800,000), the realized gain on the exchange is $200,000.

However, since no noncash boot property was involved in the exchange and Beetle Corporation received solely stock in another corporation, the recognized gain becomes $0. Beetle Corporation doesn't recognize any of the $200,000 gain as it received no noncash boot property in the transaction.