Question

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2013, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2017, she sold the bond for $9,800, which included $200 of accrued interest.a. Theresa has $200 interest income and a $400 loss from the bond in 2017.b. Theresa has $200 interest income and a $200 gain from the bond in 2017.c. Theresa has a $100 loss from the sale of the bond and no interest income.d. Theresa's loss on the sale of the bond is $600.e. None of these.

Answer 1

Answer:

a. Theresa has $200 interest income and a $400 loss from the bond in 2017

Explanation:

Since the bond was sold for $9,800 which includes the $200 accrued interest that means it reflects the interest income of $200

And, if we exclude the interest income from the sale value of bond, then the value is $9,600 and its purchase price without considering the accrued interest is $10,000. So, after comparing the purchase price and the sale price the loss of $400 would be determined

$9,600 - $10,000 = $(400)