Question

On November 1 of year 0, Jaxon borrowed $44,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of $3,960 relating to the 12-month period from November of year 0 through October of year 1.

a. How much interest, if any, can Jaxon deduct in year 0 if his business uses the cash method of accounting for tax purposes?

b. How much interest, if any, can Jaxon deduct in year 0 if his business uses the accrual method of accounting for tax purposes?

Answer 1

	CALCULTION OF MONTHLY INTEREST EXPENSES
Working Notes:
	Total interest on loan	$                        3,960
	Divide By	"/" By
	No of Months of interest	12
	Monthly Interest Expenses	$                            330
Solution: A
	Calculation of Interest expenses recognize in the Year 0
	As per Cash basis of accounting
	Interest Expenses paid in Cash in year 0	$                        3,960
	All cash Paid in year 0 is Interest expenses recognized in same year =	$                        3,960
	Answer = $ 3,960
Solution: B
	Calculation of Interest expenses recognize in the Year 0
	As per accrual basis of accounting
	Monthly Interest Expenses	$                            330
	No. of Months Expired in calendar Year 0 (November & December )	2	Months
	Interest Expenses =	Monthly Rent Expenses	"X"	No. of Months
	Interest Expenses =	$                            330	"X"	$                        2
	Interest Expenses =	$                            660
	Answer = $ 660 as per accrual Basis
Answer =		Deduction Amount
	Cash Method	$                        3,960
	Accrual Method	$                            660