Question

Able Electronics Company issues a $1,000,000, 8%, 20-year mortgage note on January 1. The terms provide for semi-annual installment payments, exclusive of real estate taxes and insurance, of $58,276. After the first installment payment, the principal balance is Select one: a. $1,000,000. b. $962,717. c. $941,717. d. $981,724. e. $955,002.

Answer 1

Answer:

d. $981,724.

Explanation:

Installment Amount comprises of two components: Interest Payment and Principal Amount. The interest expense is deducted from the amount of installment to calculate the amount of Principal Paid, this portion of Principal is deducted from the Opening balance of loan to find out the closing balance which we are supposed to calculate here.

Since, the installment is made semi-annually, so we have to calculate the semi-annual interest expense which is $40,000 [1,000000 * (8% / 2) ] and the portion of Principal that is paid is $18,276 (58,276 - 40,000). This makes the closing balance of Principal to be $981,724 (1,000,000 - 18,276).