Eric, a cash basis taxpayer, owned 25% of Watson, Inc. stock. Watson, Inc. files a calendar year U.S. Corporate Income Tax Return Form 1120 employing the accrual method of accounting. Eric loaned Watson, Inc. $100,000 at the beginning of 2003. The accrued interest on this loan was $5,000 as of December 31, 2003. Watson,Inc.paid Eric the $5,000 in January of 2004. How should Eric report the interest income and Watson, Inc. report the interest expense from this transaction?

Question

Answer: B - Watson, Inc. reports the expense in 2003 and Eric reports the income in 2004.

Ted Chan · Accepted Answer

Watson, Inc. reports the expense in 2003 and Eric reports the income in 2004

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