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Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for...

Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee's stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale, whereas Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, whereas current E & P (before distributions) was $90,000. Which statement is correct?

a. Renee recognizes a $60,000 gain on the sale of the stock.

b. Renee recognizes a $64,000 gain on the sale of the stock.

c. Chad recognizes dividend income of $120,000.

d. Chad recognizes dividend income of $30,000.

e. None of the above

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Answer #1

B.Renee Recognizes a $64000 gain on sale of stock.

Order of Payments:

1st payout of Current E&P

2nd payout of Accumulated E&P

3rd payout of Paid In Capital.

In Case Of Renee:

Cash Distributed to Renee:$60000

Paid out of Accumulated E&P:$26000

Paid out of Current E&P:30000

Paid out of Paid in Capital :4000

Therfore Renee has a gain of $64000 (180000-120000-4000) in sale of stock.

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