Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2018, for $11,000. The bonds have an annual interest rate of 3% and a maturity date of December 31, 2027. If Jason elects to amortize the bond premium, what is his taxable interest income for 2018 and the adjusted basis for the bonds at the end of 2018 (assuming straight-line amortization is appropriate)?
A) $300 and $11,000
B) $300 and $10,900
C) $200 and $11,000
D) $200 and $10,900
E) None of the above

Question

Quizplus · Accepted Answer

To amortize the bond premium, we need to calculate the annual amortization amount first:

Premium amortization per year = (purchase price - face value) / years to maturity
= ($11,000 - $10,000) / 10
= $100

So, Jason's amortization of bond premium for 2018 will be $100 ($10,000 * 3% = $300 - $100 = $200 taxable interest income).

Adjusted basis at the end of 2018 = purchase price - total amortization
= $11,000 - $100
= $10,900

Therefore, the correct choice is D.

Jason Owns Blue Corporation Bonds (Face Value of $10,000), Purchased