Barry and Larry,who Are Brothers,are Equal Owners in Chickadee Corporation

question 67

Multiple Choice

Barry and Larry,who are brothers,are equal owners in Chickadee Corporation.On July 1,2016,each loans the corporation $10,000 at an annual interest rate of 10%.Both shareholders are on the cash method of accounting,while Chickadee Corporation is on the accrual method.All parties use the calendar year for tax purposes.On June 30,2017,Chickadee repays the loans of $20,000 together with the specified interest of $2,000.How much of the interest can Chickadee Corporation deduct in 2016?

• A)$0
• B)$500
• C)$1,000
• D)$2,000
• E)None of the above

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Definitions:

Current Liabilities

Short-term financial obligations that are due within one year or within the normal operating cycle of the business, whichever is longer.

Acid-Test Ratio

A liquidity ratio that measures a company's ability to pay off its current liabilities with its most liquid assets, excluding inventory.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.

Accounts Receivable Turnover

A financial ratio indicating how efficiently a company collects its accounts receivable, calculated as net credit sales divided by average accounts receivable.