Question

On July 1, 2016, Katrina purchased tax-exempt bonds (face value of 75,000) for82,000. The bonds mature in five years, and the annual interest rate is 6

a. How much interest income and/or interest expense must Katrina report in 2016?
b. What is Katrina's adjusted basis for the bonds on January 1, 2017?

Answer 1

Katrina must report $4,500 in interest income for 2016. Her adjusted basis for the bonds on January 1, 2017 would be $77,500.

Step-by-step explanation:

a. In 2016, Katrina must report the interest income from the tax-exempt bonds she purchased. The interest income can be calculated using the formula:

Interest Income = Face Value of Bonds × Annual Interest Rate

Given that the face value of the bonds is $75,000 and the annual interest rate is 6%, the interest income for 2016 would be $4,500.

b. To calculate Katrina's adjusted basis for the bonds on January 1, 2017, we need to subtract the amount of interest income reported in 2016 from the purchase price of the bonds. The adjusted basis can be calculated using the formula:

Adjusted Basis = Purchase Price - Interest Income

Given that Katrina purchased the bonds for $82,000 and reported $4,500 in interest income, her adjusted basis for the bonds on January 1, 2017 would be $77,500.