Question

Karen owns city of richmond bonds with a face value of $10,000. she purchased the bonds on january 1, 2017, for $11,000. the maturity date is december 31, 2026. the annual interest rate is 4%. what is the amount of taxable interest income that karen should report for 2017, and the adjusted basis for the bonds at the end of 2017, assuming straight-line amortization is appropriate?

Answer 1

One-tenth of the bond premium is amortized each year under the straight-line method. This reduces the adjusted basis of the bond to $10,900 ($11,000 – $100). Because the bond is tax-exempt, the bond premium amortization is not deductible from gross income.