AICPA CPA-Regulation Exam - Topic 1 Question 19 Discussion

Actual exam question for AICPA's CPA-Regulation exam

Question #: 19
Topic #: 1

Allen owns 100 shares of Prime Corp., a publicly-traded company, which Allen purchased on January 1, 2001, for $10,000. On January 1, 2003, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, 2003, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for 2003?

A$300

B$750

C$1,500

D$2,000

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original shares over both the original shares and the new shares received, resulting in the same total basis but a lower basis per share of stock helD. Therefore, Allen's total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares).

Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200).

Consequently, his basis in the 100 shares sold is 100 x $50 = $5,000. Calculate his gain as follows:

Choices 'a', 'b', and 'd' are incorrect.

by Joanna at May 06, 2022, 09:33 PM

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5 months ago

Option A seems like the easiest choice, but I'm wondering if that's really enough. Maybe I should consider option D and explicitly state the requirement in the communication plan to make it crystal clear. I don't want to risk any sensitive info slipping through.

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