Freddy purchased a certificate of deposit for $20,000 on July 1,2013.The certificate's maturity value in two years (June 30,2015)is $21,218,yielding 3% before-tax interest.

Question

Quizplus · Accepted Answer

According to the accrual accounting method, income must be recognized when earned, not when received. In this case, the interest earned on the certificate of deposit is accrued on a yearly basis, so 50% of the interest earned ($1,218 x 50% = $609) must be recognized as gross income in 2013, and the other 50% must be recognized in 2015. Therefore, the correct choice is D, which states that Freddy must recognize $300 ($609 x 0.03) gross income in 2013.

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