Home » Test Prep » CPA Regulation » Which one of the following statements is correct with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest?
Which one of the following statements is correct with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest?
A. The amortization is treated as an itemized deduction.
B. The amortization is not treated as a reduction of taxable income.
C. The bond’s basis is reduced by the amortization.
D. The bond’s basis is increased by the amortization.
Correct Answer: C
Explanation/Reference: Explanation:
Choice "c" is correct. The bond’s basis is reduced by the amortization of the premium.
Choice "a" is incorrect. For bonds acquired after 12/31/87, the amortization of the premium is an offset to interest income on the bond rather than a separate interest deduction. Choice "b" is incorrect. The amortization of the premium will reduce taxable income. Choice "d" is incorrect. The bond’s basis will be decreased by the amortization.
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