Question

Exercise 14-21 (Algorithmic) (LO. 3) Heather owns 700 shares of Diego Corporation common stock for which she paid $14,000. She receives a nontaxable stock dividend of 70 shares of preferred stock on her common stock. The fair market values on the date of distribution of the preferred stock dividend are $40 a share for common stock and $200 a share for preferred stock. What is Heather's basis in the common and preferred shares

Answer 1

Answer: See explanation

Step-by-step explanation:

The fair market value of the common stock will be:

= $40 × 700

= $28000

The fair market value of the preferred stock will be:

= $200 × 70

= $14000

Total fair market value = $28000 + $14000 = $42000

The basis for common stock will be:

= 28000/42000 × 14000

= 9333

The basis for preferred stock will be:

= 14000/42000 × 14000

= 4667

Heather's basis in the common and preferred shares are 9333 and 4667 respectively