Freddy purchased a certificate of deposit for $20,000 on July 1, 2014. The certificate's maturity value in two years (June 30, 2016) is $21,218, yielding 3% before-tax interest.

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Since the certificate of deposit matures on June 30, 2016, interest income would ordinarily be recognized in that year. However, if the certificate is held for less than 12 months, the interest income is not deferred until maturity. Instead, it is recognized currently as investment income. Because July 1, 2014, is less than six months before year-end, only one-half year's interest is included in gross income for 2014. The remaining half is included in gross income in 2016 when the certificate matures. Therefore, Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2014.

Freddy Purchased a Certificate of Deposit for $20,000 on July