Riva borrows $10,000 that she intends to use for purchasing supplies for her business.She temporarily deposits the funds in her personal checking account.Prior to the deposit,the checking account held $40,000 of personal funds.Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account.Later in the month,the business supplies bill arrives and Riva writes a check for $10,000 from the personal account.With respect to the interest expense on the $10,000 loan
A)it will all be treated as trade or business expense.
B)60 percent will be treated as personal interest expense and 40 percent as trade or business expense.
C)it will all be treated as personal expense.
D)20 percent will be treated as trade or business expense.

Question

Quizplus · Accepted Answer

Since Riva deposited the $10,000 loan into her personal account before using it for business purposes, it becomes indistinguishable from her personal funds. Therefore, any interest expense incurred on the loan will need to be allocated between personal and business use. The allocation is based on the ratio of average monthly balances of personal and business accounts. In this case, the personal checking account had an average balance of $40,000, while the business account balance is unknown. Therefore, the interest expense on the loan will be allocated 60 percent as personal interest and 40 percent as trade or business expense.

Riva Borrows $10,000 That She Intends to Use for Purchasing