Mel purchased 100 shares of common stock in X Corporation for $1,000. X distributed a nontaxable stock dividend and Mel received 20 shares of preferred stock as a result. On the date of the dividend, the common stock had a value of $19 per share and the preferred had a value of $5 per share. After the distribution of the preferred stock, Mel's bases for the stock held in X Corporation are:
A.$1,000 common and $0 preferred.
B.$950 common and $50 preferred. Correct
C.$830 common and $170 preferred.
D.$792 common and $208 preferred.
Explanation:
Because the stock dividend was nontaxable, the $1,000 original basis of Mel's common stock must be allocated between the common and preferred shares based on their relative fair market value. Common stock has a value of $1,900 (100 × $19) and preferred has a value of $100 (20 × $5). $1,000 × (1,900 ÷ 2,000) = $950 basis of the common stock. $1,000 × (100 ÷ 2,000) = $50 basis of the preferred stock.
So first of all, first time I noticed a Ninja typo (bases?) lol. Secondly, I'm probably just missing the obvious here but in the explanation, where is the 2,000 coming from?
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