Question
On 1 January of the current year, Taxpayer purchased a corporate bond with a maturity (face) value of $50,000 on the secondary market for $48,000.
On 1 January of the current year, Taxpayer purchased a corporate bond with a maturity (face) value of $50,000 on the secondary market for $48,000. The bond has a stated interest rate of 5 percent, with interest payable semiannually on 30 June and 31 December in every year, including the year of maturity. Taxpayer holds the bond until it matures.
Absent any special elections, determine the statements that correctly describes the taxable income taxpayer will recognize in the year the bond matures.
a) Taxpayer will recognize $2,500 of interest income and $2,000 of capital gain.
b) None of these answers is correct.
c) Taxpayer will recognize $4,000 of interest income and no gain or loss.
d) Taxpayer will recognize $500 of interest income resulting from $2,500 of interest paid less $2,000 of amortization and no capital gain or loss.
e) Taxpayer will recognize no interest income and $4,500 of capital gain.
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