Question

Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2018, for $11,000. The bonds have an annual interest rate of 3% and a maturity date of December 31, 2027. If Jason elects to amortize the bond premium, what is his taxable interest income for 2018 and the adjusted basis for the bonds at the end of 2018 (assuming straight-line amortization is appropriate)?

a. $300 and $11,000
b. $300 and $10,900
c. $200 and $11,000
d. $200 and $10,900
e. None of the above

Answer 1

If Jason elects to amortize the bond premium, his taxable interest income for 2018 would be $300 and the adjusted basis for the bonds at the end of 2018 would be $10,900.

Step-by-step explanation:

If Jason elects to amortize the bond premium, his taxable interest income for 2018 would be $300 and the adjusted basis for the bonds at the end of 2018 would be $10,900.

To calculate the taxable interest income, we need to determine the amortization amount for the bond premium. The bond premium is the difference between the purchase price and the face value of the bond, which in this case is $11,000 - $10,000 = $1,000.

We can then divide the premium by the number of years to maturity to determine the annual amortization amount. In this case, it would be $1,000 / 10 = $100.

Since Jason purchased the bond on January 1, 2018, he would have owned the bond for the entire year, and therefore the taxable interest income for 2018 would be $100 (1% of $10,000 face value) + $200 (2% of the $10,000 face value), which equals $300.

The adjusted basis for the bonds at the end of 2018 would be the purchase price minus the amortization amount, which in this case would be $11,000 - $100 = $10,900.