Question

On January 1, 2020, Adele gave Josh, her son, a 36-month certificate of deposit she had purchased on December 31, 2018, for $8,638. The certificate had a maturity value of $10,000 and the yield to maturity was 5% with interest compounded annually. On December 2, 2020, Adele also gave 500 shares of stock in Disney to Josh. On November 30, 2020, Disney had declared a dividend of $1.00 per share payable to stockholders of record on December 5th.

Required: Determine the amount of interest and dividends (if any) that Josh must include in his gross income for 2020? Show computations to support your answer.

Answer 1

The amount of interest and dividends (if any) that Josh must include in his gross income for 2020 :

Interest Income = $ 454

Adele purchased certificate of deposit on December 31, 2018, for $8,638. She would have reported income of $ 432 (8638*5%) in 2019. Adjusted basis of certificate of deposit for Josh will be $ 9,070 (8638+432).

Josh will report income of $454 (9070*5%) for 2020.

Dividend Income = $0

Dividend was declared on 30th November 2020 whlie Josh received shares on 2nd December 2020. As dividend was declared before Josh received Stock, dividend must not be included in his gross income but dividend will be included in Adele's Income for 2020.