Question

Rodney, the sole shareholder of Orange Corporation, an accrual method, calendar year corporation, loaned the corporation a substantial amount of money on January 1, 2018. Orange Corporation accrued $45,000 of interest expense on the loan on December 31, 2018. Orange pays the interest to Rodney, a cash basis taxpayer, on January 1, 2019. Based on these facts:
a. Orange Corporation will be allowed to deduct the interest expense in 2018 and Rodney will be required to report the interest income in 2019.

b. Orange Corporation will be allowed to deduct the interest expense in 2019 and Rodney will be required to report the interest income in 2018.

c. Orange Corporation will be allowed to deduct the interest expense in 2018and Rodney will be required to report the interest income in 2018.

d. Orange Corporation will be allowed to deduct the interest expense in 2019 and Rodney will be required to report the interest income in 2019.

e. None of the above.

Answer 1

Answer:

d. Orange Corporation will be allowed to deduct the interest expense in 2019 and Rodney will be required to report the interest income in 2019.

Explanation:

Since Orange Corporation is an accrual based organisation they cannot deduct the interest expense until Rodney (a cash basis taxpayer) recognises it as an income.

Rodney will recognise the income in January 2019 when he has received payment, and this is when Orange Corporation will ba able to deduct the interest expense.