Freddy purchased a certificate of deposit for $20,000 on July 1, 2019.The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.
A)Freddy must recognize $1,218 gross income in 2019.
B)Freddy must recognize $1,218 gross income in 2021.
C)Freddy must recognize $600 (0.03 × $20,000) gross income in 2021.
D)Freddy must recognize $300 (0.03 × $20,000 × 0.5) gross income in 2019.
E)None of these.

Question

Quizplus · Accepted Answer

The certificate of deposit matures on June 30, 2021, which means that any interest earned is recognized in that year. However, the question is asking for the gross income that needs to be recognized in 2019. Since the certificate was purchased on July 1, 2019, only half a year's worth of interest can be recognized in that year. Therefore, Freddy must recognize $300 (0.03 × $20,000 × 0.5) gross income in 2019.

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