2. Kevin purchased 5,000 shares of Purple Corporation stock at $12 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple stock, the per share basis, and gain recognized upon receipt of the common stock dividend

$60,000 basis in stock, $11.43 basis per share, $0 recognized gain.

Explanation:

Calculation for the basis of the Purple stock, the per share basis, and gain recognized upon receipt of the common stock dividend

Based on the information given the $60,000 which is value of the shares will be allocated to the total shares that was owned after the stock dividend of $5,250 ($5,000 + $250 = 5,250)

Note that :(5%*5,000=$250)

Secondly the basis per share will be $11.43 calculated as ($60,000/5,250)

Lastly No gain will be recognized on the receipt of the stock dividend

Therefore the basis of the Purple stock, the per share basis, and gain recognized upon receipt of the common stock dividend are:

$60,000 basis in stock

$11.43 basis per share

$0 recognized gain.

the answer is "b.the increased supply will create a surplus. "

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