What is the formula for calculating interest on deferred taxes?

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Multiple Choice

What is the formula for calculating interest on deferred taxes?

Interest on deferred taxes is calculated using the simple interest concept: multiply the amount deferred (the principal) by the annual interest rate and by the time the tax remains deferred. In formula form, I = P × r × t, where P is the tax amount deferred, r is the annual rate (expressed as a decimal), and t is the time in years (or a fraction of a year). This works because interest accrues on the existing deferred amount at a given rate over a period of time, so you multiply all three factors to get the total interest. For example, if 10,000 is deferred, the rate is 6% (0.06), and the deferral lasts 2 years, the interest would be 10,000 × 0.06 × 2 = 1,200. The other forms don’t fit: rate × time misses the actual amount deferred, and principal × time misses the rate, while Principal + Rate + Time would mix different units and isn’t how interest grows.

Interest on deferred taxes is calculated using the simple interest concept: multiply the amount deferred (the principal) by the annual interest rate and by the time the tax remains deferred. In formula form, I = P × r × t, where P is the tax amount deferred, r is the annual rate (expressed as a decimal), and t is the time in years (or a fraction of a year). This works because interest accrues on the existing deferred amount at a given rate over a period of time, so you multiply all three factors to get the total interest.

For example, if 10,000 is deferred, the rate is 6% (0.06), and the deferral lasts 2 years, the interest would be 10,000 × 0.06 × 2 = 1,200.

The other forms don’t fit: rate × time misses the actual amount deferred, and principal × time misses the rate, while Principal + Rate + Time would mix different units and isn’t how interest grows.

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