Question

On July 1, 2016 Harold paid $10000 for a Ten year bond with a stated interest rate of 5%, payable annually on July 1. On April 1, 2017, 274 days after purchasing the bond, Harold sold the bond to Sam for 10050. Which of the following should be reported on Harold’s return.
a. $0 of interest income and $50 of short term capitol gains
b. $125 of interest income and $50 of short term capital gain
c. $375 of interest income and $50 short term capital gain
d. $376 of interest income and $375 of short term capital loss.

Answer 1

Answer:

c. $375 of interest income and $50 short term capital gain

Explanation:

The question is to determine the income and the capital gains to be reported by Harold on his 10 year bond.

Capital Gains represent are gains or loss can either be generated as a result of selling your bond fund before its maturity or when the bond is held to maturity.

Furthermore, the rule specifies that to treat the capital gains on the bond as long term it must be held for at least a year.

In this question:

The bond was purchased on the 1st of July, 2016 at $10,000

The bond was sold April 1, 2017 at $10,050. Since, the bond was only held for 274 days. It will only get short term capital gain

Short term capital gain = $10,050- 10,000 = $50

Also, The interest on bond income = (10,000 x 5%) x ( 274/ 365 days)  

= 500 x 0.75

=$375 Interest Income