Question

18. John Simpson purchased 10 shares (cost per share $21) of Microsoft stock in its IPO on March 13, 1996. He has held the investment since the original purchase and has not reinvested any cash dividends. The stock split history is below. Calculate the number of shares that John owns today and his basis in each share. Assuming the current market price of Microsoft is $70.00 per share, how much capital gain or loss would John need to report if he sells the stock? Total Shares Basis/Share Date 09/18/1998 04/12/2002 06/26/2003 06/12/2003 05/20/2006 12/06/2008 02/20/2010 03/26/2012 Type of Split 2 for 1 2 for 1 3 for 2 3 for 2 2 for 1 2 for 1 2 for 1 2 for 1 How much capital gain or loss would John need to report if he sells the stock? b) $ 25,200 -) $100,800 $100,590 $204,400

Answer 1

Correct option is 3rd $100590

Stock split is a corporate action to increase the number of outstanding shares by issuing more shares to existing shareholders.

As number of share increases , the price per share will be based on the total purchase value to the new number of share , price per share also get split.

So thr basis for share will be = Total purchase price of share / New number of Share

Original cost of Investment in Share =10×21 =$210

Date	Type of Split	Total Shares	Basis
1998	2 for 1	10×2/1 =20	210/20 =10.5
2002	2 for 1	20×2/1 =40	210/40=5.25
2003	3 for 2	40×3/2 =60	210/60=3.5
2003	3 for 2	60×3/2=90	210/90 ( Taking in ratio as the value is in decimals )
2006	2 for 1	90×2/1=180	210/180
2008	2 for 1	180×2/1=360	210/360
2010	2 for 1	360×2/1=720	210/720
2012	2 for 1	720×2/1= 1440	210/1440

Gain om sale of 1440 number of share = 1440(70-210/1440) = 100590