On January 1 2016 Dolly pays 9380 for corporate bonds The bo

On January 1, 2016 Dolly pays $9,380 for corporate bonds. The bonds were originallyissued on January 1, 2011 for $9,330 and have a $10,000 face value. They mature on January 1, 2036. The bonds amortized carring value (ACV) on January 1, 2016 was $9,450. What portion of the $620 difference between the $9,380 Dolly paid for the bonds and their $10,000 face value is Original Issue Discount (OID)? What portion is market discount? Discuss how Dolly treats tthis amounts on her tax return.

Solution

Date of purchase=1/1/16

Amortized carrying value of the bond =$9,450.

Date of maturity=1/1/36.

Discount to be amortized=$620.

Market discount=Par value - Purchase price.

=$1,000-$9,450

=$550.

Original issue discount= Interest amortized to bond value ie., $620-$550

=$70.

Original issue discount is to be treated as interest income.

Market discount is to be treated as ordinary income and is taxed accordingly.