Question

company xyz operates a proprietorship selling automobile parts to repair shops. In 2018, Desi reported $100 million in revenue and incurred the following expenses :: $40 million is COGS, $18 million in commissions, $10 million in business interest expense, and $12 million in depreciation. ​Determine the amount of ​business interest​ Desi may ​deduct​ in 2018

company xyz  operates a consulting business on the accrual method. On 15 December 2018, Puman paid $18,000 for business insurance that provides coverage from 1 February 2019 through 31 January 2020. ​Determine the amount Punam is entitled to deduct in 2018.

Answer 1

1.

Consider if accounts are made on a cash basis then the full amount will be deducted in the Income statement.

Accrual basis - If loan was taken at the start of the year then the full amount will be deducted. However, if the loan was taken for example on 1 June 2018, then interest amount will be 10 Mn * 7/12 (7 months interest) = 5.83 Mn

2. Books are made on accrual basis, so no amount of business insurance will be deducted from 2018 Income Statement (Because the amount is for next year). However, this will be shown in Current Assets as Prepaid Business Insurance

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