Question

Max murphey, a cash basis taxpayer, borrowed $10,000 from a bank for a business loan on august 1, to be repaid one year later. the interest for one year at 6 percent was deducted from the loan proceeds in advance. his interest deduction for the current year is:

Answer 1

The maturity value of the loan is given by:

$S= \frac{P}{1-dt} \\ \\ = \frac{10000}{1-0.06\times1} \\ \\ = \frac{10000}{0.94} =\ 10,638.30$

Therefore, the amount discounted for the first 5 months is given by:

$D=Sdt=10638.30\times0.06\times \frac{5}{12} =\ 265.96$