Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest.
A) Freddy must recognize $1,218 gross income in 2018.
B) Freddy must recognize $1,218 gross income in 2020.
C) Freddy must recognize $600 (.03 × $20,000) gross income in 2020.
D) Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2018.
E) None of these.

Question

Quizplus · Accepted Answer

Freddy must recognize the interest income earned on the certificate of deposit for the tax year in which it is earned. The certificate was purchased on July 1, 2018, and matures on June 30, 2020, which means it is held for one-half of the tax year in 2018 and one-half in 2020. Therefore, Freddy must recognize half of the interest income earned in 2018, which is $300 ($1,218 × 0.5) and the other half, $918 ($1,218 × 0.5), must be recognized in 2020.

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