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

question 75

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 purchase.
• B)The OID will not be included in gross income until the end of the third year.
• C)The interest income for the first year will be greater than the interest income for the second year.
• D)The original issue discount must be amortized using the effective interest method.
• E)None of the above is correct.

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Definitions:

Subsequent Lien Creditor

A creditor who obtains a lien on a debtor's property after other liens have already been placed on the property, typically having lower priority in case of asset distribution.

Cumulative Rights

Voting rights allowing shareholders to accumulate their votes for a single candidate in a corporate election.

Secured Parties

Creditors or lenders who have a secured interest in a borrower's collateral to secure repayment of the loan.

Secured Creditor

A lender or creditor who has a legal right to seize collateral if the borrower fails to repay the debt as agreed.