On January 5, 2012, Tim purchased a bond paying interest at 6% for $30,000. On September 30, 2012, 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 2012:
A)Tim must include all of the interest in his gross income.
B)Jane reports $450 of interest income in 2012, and Tim reports $1,350 of interest income in 2012.
C)Jane reports $1,350 of interest income in 2012, and Tim reports $450 of interest income in 2012.
D)Jane must include all of the interest in her gross income.
E)None of the above is correct.

Question

Quizplus · Accepted Answer

Tim is a cash basis taxpayer, so he does not have to report the interest income until he receives it. Jane is also a cash basis taxpayer, so she must report the interest income when she receives it. The bond pays $1,800 interest on December 31, so Jane will report $1,800 of interest income in 2012. Tim will not report any interest income in 2012.

On January 5, 2012, Tim Purchased a Bond Paying Interest