Question

12. Freddy purchased a certificate of deposit for $20,000 on July 1, 2019. The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest. a. Freddy must recognize $1,218 gross income in 2019. b. Freddy must recognize $1,218 gross income in 2021. c. Freddy must recognize $600 (0.03 * $20,000) gross income in 2021. d. Freddy must recognize $300 (0.03 * $20,000 * 0.5) gross income in 2019. e. None of these.

Answer 1

Solution Certificate of deposit amount Maturity value of certificate of deposit Period of deposit Yield (before-tax interest) $20,000 $21,218 2 Years 3% Date Interest Income July 1, 2019 Dec 31, 2019 June 30, 2020 Dec 31, 2020 June 30, 2021 $20,000 x 3% x 6/12 = $20,000 x 3% x 6/12 = $20,600 x 3% x 6/12 = $20,600 x 3% x 6/12 = $300 $300 $309 $309 Carrying Value $20,000 $20,300 $20,600 $ 20,909 $21,218 Interest income recognised in Year 2019 Interest income recognised in Year 2020 ($300 + $309) Interest income recognised in Year 2021 $300 $609 $309 Hence, the correct option is, d. Freddy must recognize $300 (0.03 x $20,000 x 0.5) gross income in 2019