A Corporation Issues Debt with a Maturity Value of $1,000,000

Multiple Choice

A corporation issues debt with a maturity value of $1,000,000 for proceeds of $1,100,000. The debt matures in 10 years and pays annual interest at a rate of 10 percent. The issuer is not a money lender and there is no evidence that there was a deliberate creation of a premium. Which of the following statements is correct?

A) The corporation will be able to deduct interest of $90,000 in each of the years 1 through 10.
B) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a fully taxable gain of $100,000 in year 10.
C) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and will have a capital gain in year 10 of $100,000, only one-half of which will be taxable.
D) The corporation will be able to deduct interest of $100,000 in each of the years 1 through 10 and there will be no tax consequences at maturity.