Discuss AICPA CPA-Regulation Exam Topic 1 Question 5

On December 1, 1992, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 1993. Michaels paid the entire interest of $12,000 on December 1, 1992. What amount of interest was deductible on Michaels' 1993 income tax return?

A$12,000

B$11,000

C$1,000

D$0

Suggested Answer: B

Choice "b" is correct. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers. The loan is for 1 month in 1992 and 11 months in 1993. Therefore, 1/12 of the interest is deductible in 1992 and 11/12, or $11,000 is deductible in 1993.

Choices "a", "c", and "d" are incorrect. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers.

Get Premium CPA-Regulation Questions as Interactive Web-Based Practice Test or PDF Real Exam Format Detailed Explanations Instant Access Get Your Practice Test

9 comments · newest first

Aleisha 11 months ago

I’m confused, why isn’t it $12,000? Can someone explain?

Kenda 12 months ago

Definitely $11,000, that’s how it works for cash basis taxpayers.

Toi 12 months ago

Wait, how can she deduct the full amount if it was paid in 1992?

Lindsey 12 months ago

I think it’s only $11,000 since it’s for the 1993 return.

Jeanice 1 year ago

Interest paid is usually deductible, so $12,000 seems right.

Gene 1 year ago

Alright, time to put my SAS administration knowledge to the test. I'm pretty confident that the "Clear Projects" action will empty the user's project repository and reset the checked-out status of the "Create Tables" DI job. I'll select option C.

Bulah 1 year ago

Okay, I've got this. Wireframing is all about planning the website structure and functionality, so the answer is likely related to that.

Brandon 1 year ago

Hmm, the question mentions using the Islamabad HQ and Islamabad WAN Edges as hub sites and preferring the MPLS TLOC for FTP traffic. I think the key is figuring out which policy type and configuration would allow me to set the preferred color.

Edna 1 year ago

I feel like the answer could be 100 since that seems to be a typical limit for initial configurations in systems we've studied, but I'm not completely sure.

AICPA CPA-Regulation Exam - Topic 1 Question 5 Discussion