Ron and Tom are equal owners in Robin Corporation.On July 1,2010,each loans the corporation $20,000 at annual interest of 10%.Ron and Tom are brothers.Both shareholders are on the cash method of accounting,while Robin Corporation is on the accrual method.All parties use the calendar year for tax purposes.On June 30,2011,Robin repays the loans of $40,000 together with the specified interest of $4,000.How much of the interest can Robin Corporation deduct in 2010?
A)$0.
B)$1,000.
C)$2,000.
D)$4,000.
E)None of the above.

Question

Quizplus · Accepted Answer

According to the cash method of accounting, Ron and Tom would recognize the interest income when they receive the payments in 2011. However, since Robin Corporation uses the accrual method of accounting, it would recognize the interest expense in 2010 when the loan was incurred. Therefore, Robin Corporation can deduct $0 of interest in 2010 because the loan and interest were not repaid until 2011.

Ron and Tom Are Equal Owners in Robin Corporation