ACCT M50 PRINCIPLES OF INCOME TAXATION PRACTICE EXAM | FREE SOLVED ANSWERS
Oliver purchased $125,000 of A and D Corporation’s newly issued bonds for $114,750. The bonds carry an interest rate of 8% and mature in 5 years. What is the initial OID on these bonds?
Oliver purchased $125,000 of A and D Corporation’s newly issued bonds for $114,750. The bonds carry an interest rate of 8% and mature in 5 years. What is the initial OID on these bonds?
Multiple Choice
- a. $0
- b. $10,000
- c. $10,250
- d. $10,500.
Correct Answer: C. $10,250
Explanation: Initial OID Calculation
Step 1: Understand Original Issue Discount (OID)
Original Issue Discount (OID) occurs when a bond is purchased for less than its face value (par value). It represents the difference between the face value of the bond and its issue price.
Step 2: Identify the relevant values
- Face Value of the bonds (Par Value) = $125,000
- Issue Price of the bonds (Purchase Price) = $114,750
Step 3: Calculate the Initial OID
The initial OID is calculated by subtracting the issue price from the face value.
Initial OID = Face Value – Issue Price
Initial OID = $125,000 – $114,750
Initial OID = $10,250
Answer:
The initial OID on these bonds is $10,250.
ACCT M50 PRINCIPLES OF INCOME TAXATION PRACTICE EXAM FREE SOLVED ANSWERS