Question

Problem 7-42 (LO 7-2) (Algo)

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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	490	$	19,110
4/20/2011	390		17,472
1/29/2012	590		19,234
11/02/2014	340		12,988

If Dahlia sells 1,070 shares of Microsoft for $63,130 on December 20, 2020, what is her capital gain or loss in each of the following assumptions? (Do not round intermediate calculations.)

Problem 7-42 Part-a (Algo)

a. She uses the FIFO method.

  

b. She uses the specific identification method and she wants to minimize her current-year capital gain.

   

Answer 1

a.

Date Purhased Shares Basis

07/10/2010 490 19,110

04/20/2011 390 17,472

01/29/2012 590 19,234

11/02/2014 340 12,988

Under FIFO method 1070 shares has been sold means the below shares has been sold

07/10/2010 490 19,110

04/20/2011 390 17,472

01/29/2012 190 6,194 (19,234/590)*190

(1070-490-390)

Total adjusted basis 1070     42,776

Capital gain = (63,130 -42,776)

=$20,354

b.

Cost of shares purchased in 2009 = Basis/shares = 19,110/490

= $39 per shares

Cost of shares purchased in 2011 = Basis/shares = 17,472/390

= $44.8 per shares

Cost of shares purchased in 2012 = Basis/shares = 19,234/590

= $32.6 per shares

Cost of shares purchased in 2014 = Basis/shares = 12,988/340

= $38.2 per shares

To minimize her capital gain, Dahili should specifically identify the 390 shares purchased in 2011, then the 490 shares purchased in 2009 and then 190 of the shares purchased in 2014

under this specific identification method

390 shares purchased in 2011 $17,472

490 shares purchased in 2009 $19,110

190 shares purchased in 2014 $7,258

(12,988/340)*190

Total Basis $43,840

Capital gains = Sale proceeds - tax basis of shares sold

Capital gains = $63,130 - $43,840

Capital gains = $19,290