Eric, a Cash Basis Taxpayer, Owned 25% of Watson, Inc

question 29

Multiple Choice

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?

• A)Watson, Inc. reports the expense in 2003 and Eric reports the income in 2003
• B)Watson, Inc. reports the expense in 2003 and Eric reports the income in 2004
• C)Watson, Inc. reports the expense in 2004 and Eric reports the income in 2004
• D)None of the above

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Definitions:

Ounce

A unit of weight in the avoirdupois system, equivalent to 28.3495 grams, commonly used in the United States and the United Kingdom.

16 Oz

A unit of weight or volume in the Imperial and U.S. customary systems, equivalent to one pound or about 0.473 liters.

Centi-

A prefix used in the metric system denoting a factor of one hundredth (1/100) of a unit.

0.01

A numerical value representing one hundredth, often used in statistics, measurements, and as a decimal in mathematical calculations.