Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2017, for $11,000. The bonds have an annual interest rate of 6% and a maturity date of December 31, 2026. If Jason elects to amortize the bond premium, what is his taxable interest income for 2017 and the adjusted basis for the bonds at the end of 2017 (assuming straight-line amortization is appropriate)?
A)$600 and $11,000
B)$600 and $10,900
C)$500 and $11,000
D)$500 and $10,900
E)None of the above

Question

Quizplus · Accepted Answer

To find the taxable interest income for 2017, we need to calculate the total amount of interest that Jason received from the bond in 2017 and subtract the amount of that interest that is considered a return of principal. Since the bond has a face value of $10,000 and an annual interest rate of 6%, the total amount of interest that the bond generates per year is $600 ($10,000 x 6%).

To amortize the bond premium, we need to spread the $1,000 premium over the 10-year life of the bond. This means that Jason can deduct $100 per year ($1,000/10) from the amount of taxable interest income. Therefore, his taxable interest income for 2017 is $500 ($600 - $100).

To find the adjusted basis for the bonds at the end of 2017, we need to subtract the amount of premium that was amortized from the original cost of the bonds. Since Jason amortized $100 of the premium in 2017, his adjusted basis at the end of the year is $10,900 ($11,000 - $100).

Jason Owns Blue Corporation Bonds (Face Value of $10,000), Purchased