Question

n January of year 0, Justin paid $7,800 for an insurance policy that covers his business property for accidents and casualties. Justin is a calendar-year taxpayer who uses the cash method of accounting. What amount of the insurance premium may Justin deduct in year 0 in each of the following alternative scenarios? (Leave no answers blank. Enter zero if applicable.) Problem 9-62 Part-c (Algo)

c. Justin pays $9,000 for a 24-month policy that covers the business from April 1, year 0, through March 31, year 2. (Do not round intermediate calculations.)

Using the accrual method please

Answer 1

Under Cash Basis amount deductible = $7,800

Problem 9-62 Part-c Under Acctual Basis amount deductible = $3,375

Workings & Rationale

When cash basis of accounting is followed, whenver the cash is paid the expense is recorded in that same period only. Hence in the first case since Justin paid $780 in year 0, he will record the Insurance expense in year 0 itself.

Under acctual basis, cash payment does not matter. Expense is booked only when it belongs to that period. In the given case, Justin paid $9000 for 24 months at Apr 1 in year 0. Hence, he should record expense only from Apr 1 to Dec 31 i.e. 9 months. Expense to be booked will be 9000*9/24 = $3,375

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