By year-end. D had unsold goods on hand with a value of $25,000 yg the cash meth
ID: 2518661 • Letter: B
Question
By year-end. D had unsold goods on hand with a value of $25,000 yg the cash method of accounting, compute D's taxable income for the a. Using the accrual method of accounting, compute D's taxable income for the Which method of accounting is required for tax purposes? Why? year c. . s Prepaid Interest. In each of the following cases, indicate the amount of the deduction for the current year. In each case, assume the taxpayer is a calendar year, cash basis taxpayer a. On December 31, P, wishing to reduce his current year's tax liability, prepaid b. On December 1 of this year, T obtained a $100,000 loan to purchase her resi- c. Same as (b) except the loan was used to purchase a duplex, which she will rent to house to be used in his business. Under the lease agreement he pays $12,000 on $3,000 of interest on his home mortgage for the first three months of the follow- ing taxable year. dence. The loan was secured by the residence. She paid two points to obtain the loan bearing a 6% interest rate. others. The loan was secured by the duplex. 7-29 Prepaid Rent. This year F, a cash basis taxpayer, secured a ten-year lease on a ware- Sentemher 1 of each vear for the following twelve months' rentalExplanation / Answer
Solution:
a) The Amount of $3,000 Prepaid Interest is Deductible in the Following Year, when the Interest is Accrued.
b) The Amount of $2,000 of Prepaid Interest is Deductible (Two points equal to 2% of $100,000) Because it is related to the Acquisition Finanicng. Points paid to Refinance a Primary residence are not Deductible according to the IRS position but it must be amortized because according to the Sec 461 (g) it alloes a Deduction only for Points which is incurred with a Purchase.
c) The Amount of $2,000 have to deducted over the Period of the Loan. It is beacuse the Points which are not Related to the Acquisition Finanicng for a Principal Residence.
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