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What are the tax consequences of the sale of a bond?

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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

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Solution Summary

The solution explains the problem together with calculations for a good understanding of the discount and gain on the sale of a bond.

Solution Preview

The accrual of the bond discount is required, and the accrual entry increases the basis in the bond. The 2007 entry ...

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