Under the Original Issue Discount (OID) Rules as Applied to a Three-Year

question 71

Multiple Choice

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

• A)All of the income must be recognized in the year of maturity by a cash basis taxpayer.
• B)The OID will be included in gross income for the year of purchase.
• C)The interest income will be the same each year.
• D)The interest income will be greater in the third year than in the first year.
• E)None of these is correct.

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Definitions:

Balance Sheet

The balance sheet is a financial statement that shows a company's financial position at a specific point in time, listing assets, liabilities, and shareholders' equity.

Allowance Method

Bases bad debt expense on an estimate of uncollectible accounts.

Bad Debt Expense

An expense reported on the income statement, representing the value of accounts receivable deemed non-collectible.

Accounts Receivable

Amounts owed to a company by customers for goods or services that have been delivered or used but not yet paid for.