What is ‘Ratable Accrual Method’
A method for determining when and how much income was earned over a period of time. The ratable accrual method can be used to compute the interest income for tax purposes. This is opposed to the payment method, and could be used to find the accrued market discount of a discount bond traded in the secondary bond market. It can also be used to determine property tax on real estate held over several tax periods.
Explaining ‘Ratable Accrual Method’
The ratable accrual method usually results in a greater accrual of discount than the other method for determining accrued market discount, which is the constant yield method. However, it also uses a simpler calculation: market discount is divided by the number of days from the bond’s maturity date minus the purchase date, multiplied by the number of days the investor actually held the bond.
For example if you bought a $20,000 bond for $18,000 with 400 days until expiry, then you sold that bond 300 days later for $19,500. To compute interest income you would multiply the portion of the days held by the increase in value. 300/400 = 0.75. $19,500-$18,000 = $1,500. 0.75 x $1,500 = $1,125 interest income for tax purposes.
- Section 461 and Accrual-Method Taxpayers: The Treatment of Liabilities Arising from Obligations to be Performed in the Future – www.jstor.org [PDF]
- Interest Accrual and the Time Value of Money – heinonline.org [PDF]
- The Miracle of Compound Interest: Interest Deferral and Discount After 1982 – heinonline.org [PDF]
- The Deduction of Future Liabilities by Accrual-Basis Taxpayers: Premature Accruals, the All Events Test, and Economic Performance – heinonline.org [PDF]
- Impact of Economic Performance Regulations on Accrual Basis Taxpayers – heinonline.org [PDF]
- Behind closed doors at WorldCom: 2001 – meridian.allenpress.com [PDF]
- Tax Accounting Methods and Economic Performance – heinonline.org [PDF]
- The Ageless All-Events Hurdle-Part II – heinonline.org [PDF]
- Current Approaches to Corporate Debt and Financing Techniques and Related Tax Considerations – heinonline.org [PDF]