Under the original issue discount (OID)rules as applied to a three-year certificate of deposit:
A)All of the income must be recognized in the year of purchase.
B)The OID will not be included in gross income until the end of the third year.
C)The interest income for the first year will be greater than the interest income for the second year.
D)The original issue discount must be amortized using the effective interest method.
E)None of the above is correct.

Question

Quizplus · Accepted Answer

Under the OID rules, the original issue discount must be amortized using the effective interest method. This means that the discount is allocated to each year of the investment based on the effective interest rate, and the interest income recognized each year will vary. Therefore, option A is not correct since all of the income is not recognized in the year of purchase. Option B is also not correct since the OID will be included in gross income each year based on the effective interest method. Option C is incorrect since it makes a generalized assumption about the interest income, which will depend on the specific terms of the certificate of deposit.

Under the Original Issue Discount (OID)rules as Applied to a Three-Year