Question

Milton owns a bond (face value of $25,000) for which he paid $28,000. Which of the following statements is correct?

a. If the bond is taxable, Milton must amortize the $3,000 premium over its remaining life.
b. The adjusted basis of the taxable bond remains at $28,000, as the amortized amount is deducted as interest.
c. Ifthebondistax-exempt,Miltoncanelecttoamortizethe$3,000premiumovertheremaininglifeofthe bond.
d. The adjusted basis of the tax-exempt bond remains at $28,000, as the amortized amount cannot be deducted as interest.
e. None of the above is correct.

Answer 1

The correct statement is option e: None of the above is correct. The adjusted basis of the bond remains at $28,000 and the premium cannot be amortized.

Step-by-step explanation:

The correct statement in this case is option e. None of the above is correct.

The adjusted basis of a bond represents the amount the investor paid to acquire the bond. In this case, Milton paid $28,000 for a bond with a face value of $25,000. The adjusted basis of the bond remains at $28,000 and the premium of $3,000 cannot be amortized over the remaining life of the bond.

Option a is incorrect because it states that the premium must be amortized if the bond is taxable, which is not the case. Option b is incorrect because it states that the amortized amount is deducted as interest, but the adjusted basis of the bond remains at $28,000. Option c is incorrect because it states that the premium can be amortized if the bond is tax-exempt, which is not true. Option d is incorrect because it states that the amortized amount cannot be deducted as interest, but the adjusted basis of the tax-exempt bond remains at $28,000.