Freddy Purchased a Certificate of Deposit for $20,000 on July

question 103

Multiple Choice

Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest.

• A) Freddy must recognize $1,218 gross income in 2018.
• B) Freddy must recognize $1,218 gross income in 2020.
• C) Freddy must recognize $600 (.03 × $20,000) gross income in 2020.
• D) Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2018.
• E) None of these.

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Definitions:

Negotiability

The feature of a financial instrument that allows it to be transferred or assigned freely from one party to another.

Default

Failure to fulfill a legal obligation, especially failing to make a required payment on a loan or financial agreement.

Time Instrument

A financial document or negotiable instrument that promises payment of a certain sum of money at a future date, as opposed to on demand.

Payment

A financial transaction where money is transferred in exchange for goods or services.