On January 5,2016,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2016,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 2016:

A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2016.
C)Jane reports $1,350 of interest income in 2016,and Tim reports $450 of interest income in 2016.
D)Jane reports $450 of interest income in 2016,and Tim reports $1,350 of interest income in 2016.
E)None of these is correct.

Question

On January 5,2016,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2016,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 2016:
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A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2016.
C)Jane reports $1,350 of interest income in 2016,and Tim reports $450 of interest income in 2016.
D)Jane reports $450 of interest income in 2016,and Tim reports $1,350 of interest income in 2016.
E)None of these is correct.

Quizplus · Accepted Answer

Tim is the one who earned the interest from January 5 to March 31, 2016, which is $1,125 ($30,000 x 6% x 3/12). When he transferred the bond to Jane on March 31, 2016, he also transferred his right to that amount of interest. Therefore, Tim must report $1,125 of interest in his 2016 gross income. 
Jane earned the interest from April 1, 2016 to December 31, 2016, which is $1,350 ($30,000 x 6% x 9/12). Jane is the one who will receive the interest payment in December 2016. Therefore, Jane must report $1,350 of interest income in 2016.

On January 5,2016,Tim Purchased a Bond Paying Interest at 6