X Corp issues a bond on March 1, 2014 with a maturity date of February 28, 2024.

Question

X Corp issues a bond on March 1, 2014 with a maturity date of February 28, 2024. The issue price and the redemption amount is 100,000. The bonds have a 5% coupon. On March 1, 2019, C purchases the bond with a redemption amount of $10,000 for $7,000. C borrows the full $7,000 to purchase the bond. In 2019, C incurs $550 of interest expense.

a. Assuming C does not elect to accrue the market discount into income, how much of the $550 is deductible in 2019? If not all, what happens to the excess?

b. Would the answer be different if the bond was a municipal bond, the interest income on which is not taxable?

Explanation / Answer

Answer: a)

Yes, $500 will be allowed as expenses to Mr. C. because, All expenses which are incurred to earn a particular income is allowed to the extent of income. so in this quiestion :-

income = 10000*5% = 500 (assume $ 550 is for 1 year )

Expenses incurred =$550

So disallow expenses = $550-$500 =$50

Answer: b)

There is no chances to allow expenses which are incurred to earn exempt income. so, in this question if $550 is incurred exempt income then $550 is not allowed as deduction.

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