Theresa,a cash basis taxpayer,purchased a bond on July 1,2007,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2010,she sold the bond for $10,150,which included $200 of accrued interest.

Question

Quizplus · Accepted Answer

Theresa is a cash basis taxpayer, so she does not recognize the $400 of accrued interest she paid when she purchased the bond. Her basis in the bond is $10,000. 
Theresa received interest of $800 on December 31 of 2007, 2008, and 2009, for a total of $2,400. She recognized this interest income in the years it was received. 
When Theresa sold the bond on March 31, 2010, she received $10,150, which included $200 of accrued interest. Her gain on the sale is the difference between the selling price ($10,150) and her basis in the bond ($10,000), plus any recognized but unpaid interest ($200):
Gain = ($10,150 - $10,000 + $200) = $350
Theresa recognized $200 of interest income in 2010, which she received on December 31, 2009. 
Therefore, Theresa has $200 of interest income and a $50 gain (not loss) from the bond in 2010, for a total of $250 of income from the bond. 
So, the correct answer is D.

Theresa,a Cash Basis Taxpayer,purchased a Bond on July 1,2007,for $10,000,plus