Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:
A)All of the income must be recognized in the year of maturity by a cash basis taxpayer.
B)The OID will be included in gross income for the year of purchase.
C)The interest income will be the same each year.
D)The interest income will be greater in the third year than in the first year.
E)None of these is correct.

Question

Quizplus · Accepted Answer

Under the original issue discount (OID) rules, the interest income recognized increases each year because it is calculated on a compounding basis. This means that in a three-year certificate of deposit, the interest income recognized in the third year will be greater than in the first year.

Under the Original Issue Discount (OID) Rules as Applied to a Three-Year