Joined: 02 Jan 2011
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Posted: 04 May 2012 at 14:35 | IP Logged
Could please somebody explain the answer? Thank you.
In 2008, Celia Mueller bought a $1,000 bond issued by
Disco Corporation, for $1,100. Instead of paying off the
bondholders in cash, Disco issued 100 shares of preferred
stock in 2011 for each bond outstanding. The preferred
stock had a fair market value of $15 per share. What is
the recognized gain to be reported by Mueller in 2011?
1 $400 dividend.
2. $400 long-term capital gain.
3. $0.
4. $500 long-term capital gain.
$0 is the answer
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Joined: 17 Jan 2011
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Posted: 04 May 2012 at 17:30 | IP Logged
In my understanding, this applies for tax free distributions. (1) Return of capital (2) Stock split (3) Stock dividend (Unless cash or other property option) (4) Life insurance dividend
Preferred stock distributed is stock dividend, so this is tax free and no gain and recognized.
Joined: 02 Aug 2010 Location: United States
Online Status: Offline Posts: 210
Posted: 09 May 2012 at 22:51 | IP Logged
lauritta, This is an exchange of like property. The bondholder got a stock instead of the bond. That simple. To add to this, keep in mind his basis in the stock is the same as the bond. If he would to sell the stock at $15 then he recognizes the $400 gain. Hope that helps and good luck!!
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Topic: Recognition of gain
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