On January 5,2015,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2015,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2015:

Question

Quizplus · Accepted Answer

Since both Tim and Jane are cash basis taxpayers, the interest income is taxable to the person who holds the bond on the date the interest payment is received, which is December 31, 2015.

Thus, Jane is the holder of the bond on that date and must report the $1,800 interest income for 2015. However, she acquired the bond from Tim on March 31, 2015, which is after the interest had accrued for the first quarter of the year (January 1 to March 31).

Therefore, Tim is entitled to the interest accrued during that period, which is $450 (6% of $30,000 for 91/365 days). Hence, Tim should report $450 of interest income in 2015, and Jane should report $1,350 of interest income in 2015.

On January 5,2015,Tim Purchased a Bond Paying Interest at 6