Question
Gary a cash basis taxpayer buys a bond for $100,000 on January 1, 2020. The bond pays interest on an annual basis. The coupon will
Gary a cash basis taxpayer buys a bond for $100,000 on January 1, 2020. The bond pays interest on an annual basis. The coupon will be paid on January 1, 2021. The interest rate is 10%. How much interest income will Gary recognize in 2020? Assume instead that the bond is purchased on January 1, 2020 for $100,000 except it won't pay interest at all. Instead in 7.2 years it will pay the owners of the bond $200,000. That is equal to a 10% compounded rate of return. How much interest income will Gary include in his taxable income in 2020? Why? Explain the rationale for the rule. On the first bond, why must Gary include the income?
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