Question

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest. In December, Tom collected $500 interest from the bond. Tom's interest income from the bond for the year is $500.

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Answer 1

Tom's interest income from the bond for the year is $500.

Step-by-step explanation:

Tom's interest income from the bond for the year is $500. As a cash basis taxpayer, Tom recognizes interest income when it is received. Since Tom collected $500 interest from the bond in December, that is the amount he will report as interest income for the year.

The $100 accrued interest that he paid when purchasing the bond is not included as income until it is received. Therefore, his interest income from the bond for the year is $500.