reported when it is earned, regardless of the taxpayer's accounting method. The interest "earned"
is calculated by the effective interest rate method.
The original issue discount rules do not apply to U.S. savings bonds or to obligations with a
maturity date of one year or less from the date of issue.
Kunto's gross income from the certificate is $3,772 ($50,000 - $46,228). Kunto's income earned
in 2018 is calculated as follows:
$46,228 x 4% = $1,849.12 rounded to $1,849.
Kunto's income earned in 2019 is calculated as follows:
[($46,228 + $1,849) x 4%] = $1,923.08, rounded to $1,923.
Exercise 4-21 (LO. 2)
On January 1, 2018, Kunto, a cash basis taxpayer, pays $46,228 for a 24-month certificate. The
certificate is priced to yield 4% (the effective interest rate) with interest compounded annually. No
interest is paid until maturity, when Kunto receives $50,000.
In your computations, round any amounts to the nearest dollar.
Compute Kunto’s gross income from the certificate for 2018.
Compute Kunto’s gross income from the certificate for 2019.
Exercise 4-22 (LO.2)
Bigham Corporation, an accrual basis calendar year taxpayer, sells its services under 12-month
and 24-month contracts. The corporation provides services to each customer every month. On July
1, 2018, Bigham sold the following customer contracts:
Length of contract
Determine the income to be recognized in taxable income in 2018 and 2019.
Length of Contract