Question

On November 1 of year 0, Jaxon borrowed $38,000 from Bucksnort Savings and Loan for use in his business. In December, Jaxon paid interest of $3,420 relating to the 12-month period from November of year 0 through October of year 1.

(Do not round intermediate calculations.)

How much interest, if any, can Jaxon deduct in year 0 if his business uses the cash method of accounting for tax purposes?

Answer 1

Answer:

$570

Explanation:

The computation of the interest deduction is shown below:

= Interest paid × number of months ÷ (total number of months in a year)

= $3,420  × 2 months ÷ 12 months

= $570

The interest which is deducted in year 0 under the cash method of accounting is $570

And, the two months is calculated from the November 1 to December 31

We simply apply the interest paid formula.