Question

Several years ago, Kurt paid $15,000 for 1,000 shares of stock in ABC. During the current year ABC declares a three-for-one stock split. Shortly thereafter, Kurt sells 1,000 shares of ABC stock for $12,000. His recognized gain on the sale of the 1,000 shares is:A. $7,000.B. $2,000.C. $0.D. $12,000.E. $5,000.

Answer 1

A. $7,000

Step-by-step explanation:

Kurt paid $15,000 for 1,000 shares.

As ABC company declares 3-for-1 stock split, the new number of shares = 1,000 × 3 = 3,000 shares.

New purchase price of each share = $15,000 ÷ 3,000 = $5.

1,000 shares price = 1,000 × 5 = $5,000.

Kurt sells 1,000 shares for $12,000.

Therefore, recognized gain = $(12,000 - 5,000) = $7,000.

However, because of stock split, Kurt gets high profit including an unrecognized profit too.