Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017) is $21,218,yielding 3% before-tax interest.

Question

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According to the accrual accounting method, interest income should be recognized as it is earned. Although the matured value of the certificate of deposit is $21,218, the interest income earned during the first year (July 1, 2015 – June 30, 2016) should be recognized in 2015. The interest earned during the second year (July 1, 2016 – June 30, 2017) should be recognized in 2016. Therefore, the interest income earned in 2015 is $600 ($20,000 x 0.03), but since the certificate was purchased on July 1, 2015, only half of the year’s interest income should be recognized in 2015, which is $300. Therefore, the correct answer is D.

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