On December 19, 2020, Logo Inc., an accrual basis corporation, accrued $50,000 compensation expense for a routine year-end bonus payable to Mr. Craig, who is Logo's CFO. Logo paid the $50,000 to Mr. Craig on April 25, 2021. Which of the following statements is true?

Question

Quizplus · Accepted Answer

According to the accrual basis of accounting, expenses are recorded when they are incurred, regardless of when they are paid. In this case, Logo accrued the $50,000 bonus expense in 2020, but did not pay it until April 25, 2021. As a result, Logo cannot deduct the expense in 2020, since the payment was not made within the taxable year. The fact that Mr. Craig is the CFO and a related party does not affect this conclusion. Therefore, choice C is the correct answer.