Freddy purchased a certificate of deposit for $20,000 on July 1, 2012.The certificate's maturity value in two years (June 30, 2014) is $21,218, yielding 3% before-tax interest.
A)Freddy must recognize $1,218 gross income in 2012.
B)Freddy must recognize $1,218 gross income in 2014.
C)Freddy must recognize $600 (.03 ´ $20,000) gross income in 2014.
D)Freddy must recognize $300 (.03 ´ $20,000 ´ .5) gross income in 2012.
E)None of the above.

Question

Quizplus · Accepted Answer

Freddy must recognize the interest income for the year in which it was earned. The certificate of deposit was purchased on July 1, 2012, so the interest income earned for the first half-year (July 1 - December 31, 2012) must be recognized in 2012. The interest income for the second half-year (January 1 - June 30, 2013) must be recognized in 2013, and the interest income for the final year (July 1, 2013 - June 30, 2014) must be recognized in 2014. Since the certificate of deposit has a maturity value of $21,218 at the end of two years, the total interest income earned is $1,218 ($21,218 - $20,000). Therefore, Freddy must recognize $300 (.03 x $20,000 x .5) gross income in 2012.

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