Question

QUESTION 5 Emrah purchased a corporate bond at its face amount of $5,000 on 1/1/2018. Under its terms, the bond pays 696 interest on 12/31 of each year of its 48 month term. On June 30, 2018, Emrah sold the bond for $5.225. He is a cash basis, calendar year taxpayer. What is the amount and character (if any) of any amounts related to the bond sale that must be recognized on his 2018 return? $0 interest income: $225 long-term capital gain $225 interest income: $0 capital gain $0 interest income: $225 short-term capital gain $150 interest income: $75 short-term capital gain

Answer 1

Question: 5

Ans: (C) $0 interest income ; $225 short term capital gain

Explanation:

1) If securities are sold within one year of purchase , any gain or less from sell will be considerd short term gain/ loss.

2) Bond was purchased on 1/1/18 but was sold on 6/30/18 i.e. within 12 month so any gain or loss realized will be considerd short term gain or loss.

3) Bond value at end of 6 month i.e 6/30/18

Purchase price	$5000
Interest @ end of 6/30/18( $5000*6%×6/12)	$150
Bond value at 6/30/2018	$5150

4) But he is a cash basis tax payer, so until cash is received, he will not recongnize interest revenue.

5) so , for Emrah gain realized would be:

= selling price of bond - purchase price of bond

= $ 5,225 - $ 5,000

=$ $225 short term capital gain.

6) Interest income is $0 because he is cash basis taxpayer and interest will be paid on dec.31 only so until real cash is received he will not recongnize interest income..