On April 1 of the current year, Henry borrows $12,000 from the bank for a year.
ID: 2565629 • Letter: O
Question
On April 1 of the current year, Henry borrows $12,000 from the bank for a year. Because the note is discounted for the interest charge and Henry receives proceeds of $10,200, he is required to repay the face amount of the loan ($12,000) in four equal quarterly payments beginning on July 1 of the current year. Henry is a cash method individual. Read the requirements. Requirement a. What is the amount of Henry's interest expense deduction in the current year with respect to this loan? (Complete all answer boxes. Enter a "O a zero amount) Henry's interest expense deduction in the current year is s Requirement b. Assume the same facts except that the iniial starting date when the repayments begin is April 1 of the following year. What is the amount of Hery's interest expense deduction in the current year? (Complete all answor boxes, Enter a Tr' a zero amount.) Henry's nterest expense deduction in the current year is S ] Requirement c. Assume the same facts as in Part b, except that Henry is an accrual method taxpayer and the loan will be outstanding for one year. What is the amount of his interest expense deduction in the current year? (Complete all answer boxes. Enter a ' a zero amount) s if Henry is and accrual method taxpayer Henrys nterest expense deduct nintre current year s .Explanation / Answer
a. Henry interest expense in the current year is $900 .Since As given in the question Henry is a cash method taxpayer, he should deduct the interest expense as if the loan is repaid.So, the total amount of the interest expense i.e. $1,800 ($12,000 - $10,200) is deductible as the loan is repaid.Four quarterly payments are to be made(as given).Henry makes two payments in the current year i.e. 1st payment on July 1 and 2nd payment is on October 1.So, 0.50 x $1,800= $900 of the interest expense is deductible in the current year.
b. In this case Henry cannot deduct any of the interest in the current financial year.Since none of the loan is repaid during the current year, none of the interest is deductible during the current year. All will all be deductible by Henry when the loan is paid off in next year and subsequently.
c. Under this situation Henry can deduct $1,350 of interest in the current year.As Henry is an accrual method taxpayer, he may deduct the interest as it accrues.Three-fourths(3/4) of the loan period occurs during the current year.So, $1,350 0.75 x $1,800= $1,350 of the interest expense is deductible during the current year.
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