Theresa,a cash basis taxpayer,purchased a bond on July 1,2008,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2011,she sold the bond for $10,150,which included $200 of accrued interest.

Question

Quizplus · Accepted Answer

Theresa is a cash basis taxpayer, so she only reports income and deductions when they are actually received or paid. Thus, she did not include the $400 accrued interest in her basis when she purchased the bond in 2008. 
In 2011, she received $800 of interest income (from January 1- March 31) and $200 of accrued interest (which was included in the sales price), for a total of $1,000. 
Since she sold the bond for $10,150, which is $150 more than its adjusted basis ($10,000 + $400 - $250 loss), she has a gain of $150. 
Therefore, choice D is correct, as it reflects the interest income and the gain/loss from the sale of the bond in 2011.

Theresa,a Cash Basis Taxpayer,purchased a Bond on July 1,2008,for $10,000,plus