Freddy purchased a certificate of deposit for $20,000 on July 1, 2017. The certificate's maturity value in two years (June 30, 2019) is $21,218, yielding 3% before-tax interest.
A)Freddy must recognize $1,218 gross income in 2017.
B)Freddy must recognize $1,218 gross income in 2019.
C)Freddy must recognize $600 (.03 × $20,000) gross income in 2019.
D)Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2017.
E)None of these.

Question

Quizplus · Accepted Answer

Freddy must recognize the interest income for the year in which it is earned. Since the certificate matures in June 2019, Freddy will earn half of the interest income ($600 x 0.5 = $300) in 2017 and the other half in 2019. Therefore, Freddy must recognize $300 gross income in 2017.

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