Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2014, for $11,000. The maturity date is December 31, 2023. The annual interest rate is 8%. What is the amount of taxable interest income that Karen should report for 2014, and the adjusted basis for the bonds at the end of 2014, assuming straight-line amortization is appropriate?

A.$0 and $10,900.
B. $0 and $11,000.
C. $100 and $11,000.
D. $100 and $10,900.
E. None of the above.

ANSWER

A.$0 and $10,900.

They are City of Richmond bonds which are tax exempted.

Hence, the amount of taxable interest income that Karen should report for 2014 = 0

Premium on the bond = 11,000 – 10,000 = 1,000

Period = 10 years

Amortization per year = 1,000 / 10 = $ 100

Adjusted basis = Purchase price – Premium amortized = 11,000 – 100 = $ 10,900