a. Capital gain = $27,020
b. Capital gain = $25,340
Explanation:
Note: This question is not complete and the data in its are merged together. The complete question with the sorted data is therefore provided before answering the question as follows:
Dahlia is in the 32 percent tax rate bracket and has purchased the following shares of Microsoft common stock over the years:
Date Purchased Shares Basis
7/10/2010 600 $30,000
4/20/2011 500 27,900
1/29/2012 700 30,520
11/02/2014 450 22,140
If Dahlia sells 1,400 shares of Microsoft for $98,000 on December 20, 2020, what is her capital gain or loss in each of the following assumptions.
a. She uses the FIFO method.
b. She uses the specific identification method and she wants to minimize her current year capital gain.
The explanation to the answer is now given as follows:
a. She uses the FIFO method
FIFO method is a share costing method under which shares bought first are the ones that are sold first.
Therefore, the capital gains of the 1,400 sold by Dahlia can be determined as follows:
Number of shares sold by Dahila = 1,400
Sales revenue from 1,400 shares sold by Dahila = $98,000
Number of shares sold from shares purchased on 7/10/2010 = 600
Number of shares sold from shares purchased on 4/20/2011 = 500
Number of shares sold from shares purchased on 1/29/2012 = Number of shares sold by Dahila - Number of shares sold from shares purchased on 7/10/2010 - Number of shares sold from shares purchased on 4/20/2011 = 1,400 - 600 - 500 = 300
Basis of 600 shares sold from shares purchased on 7/10/2010 = $30,000
Basis of 500 shares sold from shares purchased on 4/20/2011 = $27,900
Basis of 300 shares sold from shares purchased on 1/29/2012 = (Number of shares sold from shares purchased on 1/29/2012 / Number of shares purchased on 1/29/2012) * Basis of shares purchased on 1/29/2012 = (300 / 700) * $30,520 = $13,080
Total basis of shares sold by Dahila = Basis of 600 shares sold from shares purchased on 7/10/2010 + Basis of 500 shares sold from shares purchased on 4/20/2011 + Basis of 300 shares sold from shares purchased on 1/29/2012 = $30,000 + $27,900 + $13,080 = $70,980
Capital gain = Sales revenue from 1,400 shares sold by Dahila - Total basis of shares sold by Dahila = $98,000 - $70,980 = $27,020
b. She uses the specific identification method and she wants to minimize her current year capital gain.
Specific identification method is a method of determining the cost of shares sold based on specific identification and ordering of the cost of each shares.
Since Dahila wants to minimize her current year capital gain, it implies that shares with the highest cost per share are sold first and the ones with lowest cost per share sold last in that order.
Therefore, the capital gains of the 1,400 sold by Dahlia can be determined as follows:
Number of shares sold by Dahila = 1,400
Sales revenue from 1,400 shares sold by Dahila = $98,000
Cost per share of shares purchased on 7/10/2010 = Basis of shares purchased on 7/10/2010 / Number of shares purchased on 7/10/2010 = $30,000 / 600 = $50.00
Cost per share of shares purchased on 4/20/2011 = Basis of shares purchased on 4/20/2011 / Number of shares purchased on 4/20/2011 = $27,900 / 500 = $55.80
Cost per share of shares purchased on 1/29/2012 = Basis of shares purchased on 1/29/2012 / Number of shares purchased on 1/29/2012 = $30,520 / 700 = $43.60
Cost per share of shares purchased on 11/02/2014 = Basis of shares purchased on 11/02/2014 / Number of shares purchased on 11/02/2014 = $22,140 / 450 = $49.20
Ranking the cost based on the highest to the lowest cost per share calculated above, shares purchased on 4/20/2011 is first, shares purchased on 7/10/2010 is second, shares purchased on 11/02/2014 is third, and shares purchased on 1/29/2012 is fourth.
Therefore, we have:
Number of shares sold from shares purchased on 4/20/2011 = 500
Number of shares sold from shares purchased on 7/10/2010 = 600
Number of shares sold from shares purchased on 11/02/2014 = Number of shares sold by Dahila - Number of shares sold from shares purchased on 4/20/2011 - Number of shares sold from shares purchased on 7/10/2010 = 1,400 - 600 - 500 = 300
Basis of 500 shares sold from shares purchased on 4/20/2011 = $27,900
Basis of 600 shares sold from shares purchased on 7/10/2010 = $30,000
Basis of 300 shares sold from shares purchased on 11/02/2014 = (Number of shares sold from shares purchased on 11/02/2014 / Number of shares purchased on 11/02/2014) * Basis of shares purchased on 11/02/2014 = (300 / 450) * $22,140 = $14,760
Total basis of shares sold by Dahila = Basis of 500 shares sold from shares purchased on 4/20/2011 + Basis of 600 shares sold from shares purchased on 7/10/2010 + Basis of 300 shares sold from shares purchased on 11/02/2014 = $27,900 + $30,000 + $14,760 = $72,660
Capital gain = Sales revenue from 1,400 shares sold by Dahila - Total basis of shares sold by Dahila = $98,000 - $72,660 = $25,340
