On February 24, 2006, Bart Company purchased 2,000 shares of Winn Corporation’s newly issued 6% cumulative $75 par preferred stock for $152,000. Each share carried one detachable stock warrant entitling the holder to acquire at $10, one share of Winn no-par common stock. On February 25, 2006, the market price of the preferred stock was $72 a share and the market price of the stock warrants was $8 a warrant. On December 29, 2006, Bart sold all the stock warrants for $20,500. The gain on the sale of the stock warrants was:

Question

On February 24, 2006, Bart Company purchased 2,000 shares of Winn Corporation’s newly issued 6% cumulative $75 par preferred stock for $152,000. Each share carried one detachable stock warrant entitling the holder to acquire at $10, one share of Winn no-par common stock. On February 25, 2006, the market price of the preferred stock was $72 a share and the market price of the stock warrants was $8 a warrant. On December 29, 2006, Bart sold all the stock warrants for $20,500. The gain on the sale of the stock warrants was:

a. $-0-
b. $ 500
c. $ 4,500
d. $ 5,300

Answer 1

To calculate the gain on the sale of the stock warrants, we need to determine the cost basis and the proceeds from the sale.

The cost basis of the stock warrants can be calculated by multiplying the number of warrants purchased (2,000) by the cost per warrant ($10). Therefore, the cost basis is 2,000 warrants * $10/warrant = $20,000.

The proceeds from the sale of the stock warrants are given as $20,500.

To calculate the gain on the sale, we subtract the cost basis from the proceeds: $20,500 - $20,000 = $500.

Therefore, the gain on the sale of the stock warrants is $500. The correct answer is b. $500.