Freddy purchased a certificate of deposit for $20,000 on July 1,2016.The certificate's maturity value in two years (June 30,2018)is $21,218,yielding 3% before-tax interest.

Question

Quizplus · Accepted Answer

Since the certificate of deposit has a maturity value of $21,218 at the end of two years and was purchased for $20,000, the gross interest earned is $21,218 - $20,000 = $1,218. However, since the certificate was purchased on July 1, 2016, it will only earn interest for half of 2016. Therefore, the gross income that Freddy must recognize in 2016 is $1,218 × 0.5 = $609. The remaining $609 will be recognized in 2018 when the certificate matures.

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