USA Unpaid accrual expenses


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Let's say for-profit corporation ALPHA INC. borrowed $1M from person JOHN DOE, who is also an executive officer of the corporation. The corporation ALPHA INC. uses accrual accounting method, while JOHN DOE uses cash accounting method.

Furthermore, let's say that the contract between those two parties says that an interest is due on December 31 of each calendar year.


Question #1:

If the corporation ALPHA INC. decided to not pay this interest on time, it still counts to the corporation as the taxable expenses, correct? However, because the JOHN DOE was not yet paid, he should not pay any taxes from such unpaid interest, correct?

Question #2:

For the scenario described in the above question, has any of the parties to report some unpaid asset/liability?

Question #3:

Continuing with the above scenario, is there some limit (maximum) for how many years may such interest stayed unpaid? (e.g. JOHN DOE is not in a need of such money and he is waiting/hoping for some favorable tax reform)

Question #4:

Since IRS sets applicable federal rates (AFR) as minimum rates for loans, how this affects the unpaid interest? Has such unpaid interest to be adjusted accordingly? If so, with which interest rate, the one in the contract, or the AFR? (assuming the contract doesn't explicitly specify such scenario of unpaid interest)
 
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kirby

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Homework question. Post in the homework section but note the policy there that says you must answer the question yourself first.
 

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