Question

Rachelle purchased a 10,000 corporate bond on June 1,2017. The bond has a stated interest rate of 6%, payable annually on Dec 1. Since Rachelle purchased the bond between interest payment dates, how does she report the interest income on Schedule B, Interest and Ordinary Dividends?

A. She reports 298, her proportion share of the interest as taxable income. No further adjustment is necessary

B. She reports 351, the amount of interest earned from June 1 through Dec 1

C. She reports 600, the full interest payment, then subtracts 302, the amount of accrued interest, as an adjustment

D. She reports 600, the entire interest payment. No further adjustment is necessary, as the amount of accrued interest was added to Rachelle's basis at the time of purchase

Answer 1

As per the accrual principle for accounting, revenue or interest earned shall be recognized when the same is actually accrued regardless if not yer received.

Interest has been earned from June 1 through Dec 1, hence the answer is :

B. She reports 351, the amount of interest earned from June 1 through Dec 1