Freddy purchased a certificate of deposit for $20,000 on January 1,2010.The certificate's maturity value in two years (December 31,2011)is $22,050,yielding 5% before-tax interest.

Question

Quizplus · Accepted Answer

Freddy must recognize the interest income earned during the two years the certificate of deposit was held. The maturity value of the CD is $22,050, and since it was purchased for $20,000, the interest earned is $2,050. However, this interest income should be allocated evenly over the two years (2010 and 2011), so $1,000 should be recognized in 2010 and $1,000 should be recognized in 2011. Therefore, choice C is the correct answer.

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