A corporation issues debt with a maturity value of $1,000,000 for proceeds of $1,100,000. The debt matures in 10 years and pays annual interest at a rate of 10 percent. The issuer is not a money lender and there is no evidence that there was a deliberate creation of a premium. Which of the following statements is correct?
A)The corporation will be able to deduct interest of $90,000 in each of the years 1 through 10.
B)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a fully taxable gain of $100,000 in year 10.
C)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a capital gain in year 10 of $100,000, only one-half of which will be taxable.
D)The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and there will be no tax consequences at maturity.

Question

Quizplus · Accepted Answer

The corporation will be able to deduct the actual interest paid of $100,000 annually (10% of $1,000,000) over the 10 years. The premium paid ($1,100,000 - $1,000,000 = $100,000) does not affect the annual interest deduction and is amortized over the life of the bond, resulting in no additional tax consequences at maturity.

A Corporation Issues Debt with a Maturity Value of $1,000,000