On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, 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 2017:
A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2017.
C)Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017.
D)Jane reports $450 of interest income in 2017, and Tim reports $1,350 of interest income in 2017.
E)None of these is correct.

Question

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, 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 2017: ​
A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2017.
C)Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017.
D)Jane reports $450 of interest income in 2017, and Tim reports $1,350 of interest income in 2017.
E)None of these is correct.

Quizplus · Accepted Answer

When Tim purchased the bond, he acquired the right to receive the interest payment on December 31. Therefore, he must report the entire $1,800 interest in his gross income for 2017, even though he gave the bond to Jane before the interest was paid.

However, Jane is the one who actually received the interest payment, so she must report it on her tax return. Since Jane received the bond after March 31, she is entitled to nine months of interest income ($1,800 x 9/12 = $1,350) for the 2017 tax year. Therefore, Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017.

On January 5, 2017, Tim Purchased a Bond Paying Interest