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4. On January 1, Year 1, Taxpayer (“T”) purchased both a bond and stock of Corporation...

4. On January 1, Year 1, Taxpayer (“T”) purchased both a bond and stock of Corporation X. The bond was purchased for $10,000, had a face value of $10,000 and paid 10% interest ($1,000) on December 31 of each year. The stock was purchased for $10,000 and paid a dividend of $1,000 on December 31, ex- dividend date December 15. T sold both the X stock and the X bond on July 1, of Year 1. The bond sold for $10,300 and the stock sold for $11,000. What income, gain or loss, including character type (e.g. capital gain, interest, dividend, ordinary) will T recognize as a result of the sales? __________________________________ BOND __________________________________ STOCK

Solutions

Expert Solution

Income from Bond:

Interest Income = $1000

Gain on sale of Bond = $10300 - $10000

                                        = $300 (Capital Gain)

Income from Stock

Dividend Income = $1000

Gain on sale of Stock = $11000 - $10000

                                        = $1000 (Capital Gain)

Note: The character on sale of bond and stock depends on the nature of activity Taxpayer T is carrying on. Like if its ordinary business is of Purchasing and selling bond, stock than it would be consider as Ordinary Gain otherwise capital gain. Also to term as capital gain requirement of minimum holding period must be fulfilled. It is assumed that both the conditions are fulfilled.

ekkarill92 answered 1 year ago
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