Final answer:
Under the cash method, Rebecca can deduct the full amount of $4,720 this year as she paid it in December. For the accrual method, only the interest that relates to the current year is deductible, which would be $2,360, as it covers four out of the eight months in question. Option 3.
Step-by-step explanation:
The question asks how much Rebecca can deduct this year for interest on a short-term bank loan related to her business under both the cash method of accounting and the accrual method of accounting. Under the cash method of accounting, expenses are recognized when they are paid. Since Rebecca made the payment of $4,720 in December of this year, she may deduct the full amount in the current year. Therefore, under cash accounting, Rebecca can deduct $4,720 this year.
In contrast, under the accrual method of accounting, expenses are recognized when they are incurred, regardless of when they are paid. However, since the interest expense relates to the period from September 1 of this year through April 30 of next year, Rebecca will need to allocate the expense appropriately to the time period it relates to. For the current year, only the portion of the interest from September 1 to December 31 is deductible. Assuming the interest is evenly distributed over the eight-month period, she would be able to deduct 4/8 of $4,720, which equates to $2,360 for this year under the accrual method. Option 3.