Parlett Corporation has a single class of stock outstanding. Stephanie owns 200
ID: 2544551 • Letter: P
Question
Parlett Corporation has a single class of stock outstanding. Stephanie owns 200 shares of the common stock, which he purchased for $50 per share two years ago. On April 10, of the current year, Parlett Corporation distributes to its shareholders one right to purchase a share of common stock at $60 per share for each share of common stock held. At the time of the distribution, the common stock is worth $75 per share, and the rights are worth $15 per right. On September 10, Stephanie sells 100 rights for $4,000 and exercises the remaining 100 rights. He sells 60 of the shares acquired with the rights for $95 each on November 10.
a) What is the amount and character of income Stephanie recognizes when he receives the rights?
b) What is the amount and character of gain or loss Stephanie recognizes when he sells the rights?
c) What is the amount and character of gain or loss Stephanie recognizes when he exercises the rights?
d) What is the amount and character of gain or loss Stephanie recognizes when he sells the new common stock?
e) What basis does Stephanie have in his remaining shares?
Explanation / Answer
Answers:
a)
Market value of shares held by stephanie = $ 50 * 200 Shares = $ 10000
Price to be paid to buy right share = $ 60 * 200 = $ 12000
Total Cost = $ 22000
Revised cost per share = $22000/ 400 shares = $ 55 /share
Gain per share $ 75- $ 55 = $ 20
Total gain = $ 20 * 400 shares= $ 8000
b)
Value of shares before issue = 2000 shares* $ 50 per share = $ 10000
Value of shares after issue = 2000 shares* $75 per share = $ 15000 .
Value of rights received = 200 shares* ($25) per share = $ 5000
Net wealth after issue = $ 15000
Wealth remains at $ 15000
C) Wealth remains constant at $ 15000