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Posted by TomYoung on January 4, 2007, 10:17 pm
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John Pollard wrote:
> TomYoung wrote:
> > nemo wrote:
> >> I owned 500 sh DUK on 1/2/07 and received 250 sh of
> >> SPECTRA (SE) as a spin-off on that date. According to
> >> DUKE's .pdf, 58.11% of my original cost basis for DUK
> >> ($14,439.95) is to be allocated to DUK and 41.89% is to
> >> be allocated to SE.
> >>
> >> Do I use the "Corporate Spin-off" dialog, which is very
> >> confusing to me, and produces startling and inaccurate
> >> results and marvelous market values. How do I do it
> >> correctly?
>
> > Here's one way to do it. Calculate the split of your
> > cost basis:
> > 41.89% to Spectra, the remainder stays with Duke.
> > Calculate the per-share basis cost of Spectra: (41.89% x
> > Original Duke Cost Basis) /( # of Duke shares x .5).
> >
> > Enter a Return of Capital transaction from Duke on
> > 1/2/2007 for the amount of the basis allocated to Spectra
> > and specify the TRANSFER account is the same account
> > you're working in. Quicken will record a RtrnCapX
> > transaction that won't affect cash in the account but
> > will affect the Duke basis.
> >
> > Enter a Shares Added transaction for the Spectra shares
> > on 1/2/2007 with a per share cost as previously
> > calculted. Enter the "Date Acquired" date as the date of
> > your original purchase of Duke. Quicken will record an
> > Added transaction that likewise won't affect cash in the
> > account but will get the basis and date acquired correct.
>
> You have much more knowledge than I about these things; but
> doesn't your approach assume that all of the Duke shares were
> purchased in a single lot? (Not an unreasonable assumption
> based on the op's statement.)
The solution is proper for a one-time purchase of Duke Energy but can
be expanded to mulitple purchases by making the above calculations and
entries for each lot. I probably should have said that explicitly but
didn't as I was running out the door at the time.
> I think that for those whose holdings were purchased in multiple
> lots, there is a benefit to using the Quicken corporate spinoff
> transaction ... even though, my understanding is that the
> results would be improved if the Quicken generated
> return-of-capital transactions were modifed to take the cash
> from the investment account, and the generated "buy"
> transactions were changed to "Shares Added" transactions,
> assigned the original cost basis, with a transaction date
> matching the date of the spinoff. (Doing what you recommended
> for one lot; for multiple lots.)
>
> I'm thinking that the more original lots there were, the more
> sense it makes to start with the Quicken spinoff transaction,
> then plan to modify its results.
The problem is that Quicken, at least in the 2004 Deluxe version I'm
using, screws up all your prior accounting. If you go back and look at
your portfolio for times prior to the spin-off you'll see the parent
company carrying a value of (# of shares x old stock price at that
time) but a cost basis reflecting the post-split basis. Accordingly,
the unrecognized gain on the stock is wildly overstated.
The spun-off stock will be there too - even though it didn't really
exist at that time - with a value equal to cost basis, i.e., no
recognized gain.
As far as I know the method recommended is the only one that preserves
the historical accounting and reflects the historical situation
properly.
Tom Young
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