Question

Firm F, a calendar year taxpayer, owes a $200,000 long-term debt to an unrelated creditor. In December, it paid $14,160 to the creditor as interest for the 12-month period from the prior September 1 through August 31 of the following year. Compute the deduction for this payment assuming that Firm F uses the cash method of accounting for tax purposes. Compute the deduction for this payment assuming that Firm F uses the accrual method of accounting for tax purposes.

Answer 1

Answer:

$4,720 for cash and accrual method respectively

Explanation:

Under the cash method, the deduction would be

= Interest expense paid to creditor × (*number of months ÷ total number of months in a year)

= $14,160 × (4 months ÷ 12 months)

= $4,720

The 4 months is calculated from September 1 to December 31

Under the accrual method, the deduction would be

= Interest expense paid to creditor × (*number of months ÷ total number of months in a year)

= $14,160 × (4 months ÷ 12 months)

= $4,720

The 4 months is calculated from September 1 to December 31

Thus, the same deduction is allowed for both methods