Question

A cash basis taxpayer purchased a certificate of deposit for 1,000 on July 1, 2014 that will pay1,100 upon its maturity on June 30, 2016. The taxpayer must recognize a portion of the income in 2015. What is the portion of income that the taxpayer must recognize in 2015?

Answer 1

A cash basis taxpayer must recognize $30 of income in 2015 from the certificate of deposit.

Step-by-step explanation:

Certificate of Deposit (CD) is a type of investment where an individual deposits a certain amount of money for a specified period of time. The CD earns interest, and upon maturity, the individual receives the initial deposit plus the accumulated interest. In this case, the taxpayer purchased a CD for $1,000 on July 1, 2014, and it will mature on June 30, 2016, paying $1,100.

To determine the portion of income the taxpayer must recognize in 2015, we need to calculate the interest earned from July 1, 2014, to December 31, 2015. Since the CD matures on June 30, 2016, it will earn interest until the end of the previous year, 2015.

Assuming that the interest is compounded annually, we can use the simple interest formula:

Interest = Principal * Rate * Time

In this case, the principal amount is $1,000, the rate is 2% (as mentioned in the question), and the time is 1.5 years (from July 1, 2014, to December 31, 2015). Plugging in these numbers, we can calculate the interest earned during this period:

Interest = $1,000 * 0.02 * 1.5 = $30

Therefore, the taxpayer must recognize $30 of income in 2015.