Question

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2018, for $11,000. The maturity date is December 31, 2027. The annual interest rate is 4%. What is the amount of taxable interest income that Karen should report for 2018, and the adjusted basis for the bonds at the end of 2018, assuming straight-line amortization is appropriate? $0 and $11,000 $0 and $10,900 $100 and $11,000 $100 and $10,900 None of the above

Answer 1

amount of taxable interest income that Karen report for 2018 = 0

Amortization per year = $100

Adjusted basis = $ 10,900

Step-by-step explanation:

given data

face value = $10,000

purchased the bond = $11,000

interest rate = 4%

solution

we know here that City of Richmond bonds that is tax exempted

so that amount of taxable interest income that Karen report for 2018 = 0

and

as Premium on the bond is

Premium on the bond = purchased the bond - face value

Premium on the bond = 11,000 - 10,000 = 1,000

and here time Period = 10 years ( January 1, 2018 to December 31, 2027 )

so Amortization per year is

Amortization per year =
`(1000)/(10)`

Amortization per year = $100

so

Adjusted basis will be = Purchase price - Premium amortized

Adjusted basis = 11,000 - 100

Adjusted basis = $ 10,900