Barry and Larry,who are brothers,are equal owners in Chickadee Corporation.On July 1,2013,each loans the corporation $10,000 at an annual interest rate of 10%.Both shareholders are on the cash method of accounting,while Chickadee Corporation is on the accrual method.All parties use the calendar year for tax purposes.On June 30,2014,Chickadee repays the loans of $20,000 together with the specified interest of $2,000.How much of the interest can Chickadee Corporation deduct in 2013?
A)$0.
B)$500.
C)$1,000.
D)$2,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Chickadee Corporation is on the accrual method of accounting, so it can deduct the interest expense as it accrues. However, Barry and Larry are on the cash method of accounting, so they will not report the interest income until they receive it. Therefore, Chickadee Corporation can only deduct the interest expense that has accrued up to the end of 2013, which is $500 ($10,000 x 10% x 6/12).

Barry and Larry,who Are Brothers,are Equal Owners in Chickadee Corporation