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Sarantuya, a college student, feels that now is a good time to buy stocks. However, because she...

Question:

Sarantuya, a college student, feels that now is a good time to buy stocks. However, because she doesn't have any savings, she decides to borrow $22,000 at an annual interest rate of 9 percent. She must make an interest-only payment each year for five years plus repay the entire principal in year five. On August 1, 20X8 when Sarantuya obtained the loan, Sarantuya invested $13,500 in several individual stocks and used the remaining $8,500 to pay her tuition for the year. Assuming Sarantuya's net investment income this year is greater than her investment interest expense this year, how much investment interest expense can she deduct in 20X8?

Interest Expense

Suppose you borrow a loan of $10,000. The amount was invested in business and was used for personal use equally.

The amount of interest you pay on the amount invested in business will only be allowed as interest expense from the business income.

As the other part of the interest was paid on the amount for personal use, it will not be allowed as deduction from the business income.

Answer and Explanation:

The amount of $22,000 was put to two uses, first to purchase stocks and second to pay tuition fees in the ratio of 27 : 17 (13,500 : 8,500)

Only the proportionate interest on the amount of $13,500 will be allowed as a deduction from the investment income.

Interest = $13,500 * 9%

Interest = $1,215


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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