[Anonymous]

Individual tax – Gross income

In the current year, Joe Green purchased XYZ Corporation’s 10-year, 10% bonds original issue for $12,000. The bonds had a stated redemption price of $15,000. How much original issue discount must Green include in gross income in the current year assuming a current market yield for bonds of a similar quality of 14%?

A. $120 B. $180 C. $300 D. $420

Joe has to include $180 in income for the year because that’s the prorated amount of extra value he received by purchasing the bond at a discount. Is this the right logic? Thanks in advance.

[Anonymous]

Dangg is this for REG?? I have NEVER came across a question like this and I take my exam in few days. AHH

[Anonymous]

@CPA628 I think its an LSAT question

@Dukesbeach how'd you get to 180? Ive seen this referenced before but never got my head around it. I think that 300 yr is included for the difference between the purchase and maturity amount amortized but I get lost on the calc with the current yiled and the stated yield. Pure math I get the 4% times 12K = 480 – 300 amortized = 180 but I dont see the logic in that

Heres the IRS Pub on it https://www.irs.gov/pub/irs-pdf/p1212.pdf

I skimmed it but have already gone way too far down this rabbit hole for a slight potential of being on the exam

Any help from anyone with a straight forward explanation would be great!

[Anonymous]

This is out of the cpa review book:

For original issue discount bonds issued after July 1, 1982, Sec. 1272 (a) requires the inclusion in gross income of an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year the instrument was held. The daily portions are determined under Sec. 1272 (a)(3) as the ratable portion of the excess of the product of the bond's yeild to maturity and its adjusted issue price over the interest payable for the bond year. The adjusted issue price is the original issue price adjusted for the original issue discount previously taken into income (which is zero in the current year).

Yield times adjusted issue price (14% x $12,000) $1680

Less interest payable (10% x $15,000) (1,500)

Ratable portion (entire year) 180

[Anonymous]

I would've thought it was $300. Ugh! I'm so going to fail…..

[Author]

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