Jerry purchased a us series ee savings bond for 279

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5. Jerry purchased a U.S. Series EE savings bond for $279. The bond has a maturity value in 10 years of $500 and yields 6% interest. This is the first Series EE bond that Jerry has ever owned. a. Jerry must report the interest income each year using the original issue discount rules. b. Jerry can report all of the $221 interest income in the year the bond matures. c. The interest on the bonds is exempt from Federal income tax. d. Jerry must report ($500 – $279)/10 = $22.10 interest income each year he owns the bond. e. None of the above. ANS: B The original issue discount (OID) on the Series EE bonds is not subject to the OID rules. 6. Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in
advance ($500 per year), or two years in advance ($950). In September 2011, the company collected the following amounts applicable to future services: October 2011-September 2013 services (two-year contracts) $144,000 October 2011-September 2012 services (one-year contracts) 128,000 Total $272,000 As a result of the above, Orange Cable should report as gross income:
7. With respect to the prepaid income from services, which of the following is true?
Answer a. is incorrect because the tax treatment is based on the income tax provisions, whereas the financial accounting treatment is based on generally accepted accounting principles. Answer b. is incorrect because the cash basis taxpayer recognizes the income in the year of receipt. Answer c. is correct because under Revenue Procedure 2004-34 any unearned income at the end of the first tax year must be included in the gross income of the second tax year. Answer d. is incorrect because there is no three-year provision. The deferral possibilities for services to be provided exist only in the case of accrual basis taxpayers who satisfy the requirements of Revenue Procedure 2004-34.

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