In 2007, Mr Lewis paid $40,000 for a corporation bond with a $50,000 stated redemption value. Based on the bond's yield to maturity, amortization of the $10,000 discount was $695 in 2007. Mr. Lewis sold the bond for $42,000 in 2008. What are his tax consequences in each of these years, if he bought the bond in the public market through his broker?
a. 2007, $0; 2008, $2,000 capital gain
b. 2007, $0; 2008, $2,000 ordinary income
c. 2007, $695, ordinary income; 2008, $1,305 capital gain
d. 2007, $695, ordinary income; 2008, $1,305 ordinary income
The accrual of the bond discount is required, and the accrual entry increases the basis in the bond. The 2007 entry ...
The solution explains the problem together with calculations for a good understanding of the discount and gain on the sale of a bond.