On July 1, 2018, Katrina purchased tax-exempt bonds (face value of $75,000) for $82,000. The bonds mature in five years, and the annual interest rate is 6%. The market rate of interest is 2%.
a. How much interest income and/or interest expense must Katrina report in 2018, assuming that straight-line amortization is appropriate?
b. What is Katrina’s adjusted basis for the bonds on January 1, 2019?