Firm f, a calendar year taxpayer, owes a $200,000 long-term debt to an unrelated creditor. in december, it paid $14,160 to the creditor as interest for the 12-month period from the prior september 1 through august 31 of the following year. compute the deduction for this payment assuming that firm f uses the cash method of accounting for tax purposes. compute the deduction for this payment assuming that firm f uses the accrual method of accounting for tax purposes.

$4,720 for cash and accrual method respectively

Explanation:

Under the cash method, the deduction would be

= Interest expense paid to creditor × (*number of months ÷ total number of months in a year)

= $14,160 × (4 months ÷ 12 months)

= $4,720

The 4 months is calculated from September 1 to December 31

Under the accrual method, the deduction would be

= Interest expense paid to creditor × (*number of months ÷ total number of months in a year)

= $14,160 × (4 months ÷ 12 months)

= $4,720

The 4 months is calculated from September 1 to December 31

Thus, the same deduction is allowed for both methods

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