What amount should Harold report on his return with regards to the bond sale?

To determine the correct amount Harold should report regarding the bond sale, we first need to understand how interest income and capital gains are calculated for bonds.

In this scenario, Harold would report interest income earned from the bond before its sale. This could include the interest paid or accrued over the period he held the bond. The short-term capital gain arises from the difference between the sale price of the bond and its adjusted basis. If Harold sold the bond for more than he paid for it, he would report the excess as a capital gain.

In the correct response, Harold is showing $125 of interest income, which suggests he earned that amount from the bond during the period he owned it. Additionally, the report of $50 in short-term capital gain indicates that Harold sold the bond for $50 more than what he paid for it, classifying it as a short-term gain due to the holding period being one year or less.

This combination of reporting both interest income and short-term capital gain corresponds with the typical treatment of bond transactions: recognizing accrued interest income separately from any capital gain realized upon sale. The amounts reported in the other choices do not accurately combine the interest and capital gains according to the specifics presented in this scenario, which solidifies why the $125