Final answer:
The cash-basis taxpayer must recognize the $100 of interest income from the CD in the year 2016 when the income is actually received, which is upon the maturity of the CD. The correct option is 3) 2016
Step-by-step explanation:
A taxpayer who uses the cash basis of accounting recognizes income when it is actually or constructively received. In this scenario, the taxpayer purchased a certificate of deposit (CD) for $1,000 on July 1, 2014, which will mature and pay $1,100 on June 30, 2016. Since a CD is an investment with a specified maturity date and the taxpayer is using the cash basis method, they must recognize the income in the year they receive the final payment, which is upon the maturity of the CD. Therefore, the taxpayer must recognize the $100 of interest income in the year 2016 when the CD matures and the money is received.
CDs generally provide a lower rate of return compared to other investments, but they are also seen as lower risk. Interest rates on CDs have historically fluctuated with the business cycle, affecting their attractiveness as short-term or long-term investments. The correct option is 3) 2016