Question

13. 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 x 0.5) gross income in 2019. e. None of these.

Answer 1

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