Question

Max murphey, a cash basis taxpayer, borrowed $10,000 from a bank for a business loan on august 1, to be repaid one year later. the interest for one year at 6 percent was deducted from the loan proceeds in advance. his interest deduction for the current year is:

Answer 1

The maturity value of the loan is given by:


`S= (P)/(1-dt) \\ \\ = (10000)/(1-0.06*1) \\ \\ = (10000)/(0.94) =\$10,638.30`

Therefore, the amount discounted for the first 5 months is given by:


`D=Sdt=10638.30*0.06* (5)/(12) =\$265.96`