Question

. Freddy purchased a certificate of deposit for $20,000 on July 1, 2017. The certificate's maturity value in two years (June 30, 2019) is $21,218, yielding 3% before-tax interest.a. Freddy must recognize $1,218 gross income in 2017.b. Freddy must recognize $1,218 gross income in 2019.c. Freddy must recognize $600 (.03 × $20,000) gross income in 2019.d. Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2017.e. None of these.

Answer 1

d. Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2017

Step-by-step explanation:

The computation of the gross income is shown below:

= Certificate deposit × interest rate × (one year ÷ two year)

= $20,000 × 3% × (1 year ÷ 2 year)

= $300

We simply apply the simple interest formula so that we get to know how much gross income would be recognized.

Hence, all other options are wrong except d.