Other Objective Questions
Designate whether the following expenses are fully deductible (F), partially deductible (P), or nondeductible (N) in the year paid.
-On October 1, 2018, Fine Brands Corporation (a cash-basis, calendar-year taxpayer) borrowed $200,000 from the bank at 9% annual interest. On December 30, 2018, Fine Brands paid $18,000 to the bank for the first year's interest on the loan. How much can Garcia deduct in 2018 for interest expense?
A) $1,500
B) $1,620
C) $4,500
D) $18,000

Question

Quizplus · Accepted Answer

The interest expense is partially deductible in the year paid. The amount of interest that is deductible is calculated by multiplying the principal amount of the loan by the annual interest rate and then multiplying the result by the number of days the loan was outstanding during the year. In this case, the principal amount of the loan is $200,000, the annual interest rate is 9%, and the loan was outstanding for 91 days (from October 1, 2018 to December 30, 2018). Therefore, the deductible interest expense is $200,000 x 0.09 x 91/365 = $4,500.

Other Objective Questions Designate Whether the Following Expenses Are Fully Deductible (F), Partially