34. Problem 5.22 (T.oan Amortization) eBook Jan sold her house on December 31 an

Question

34. Problem 5.22 (T.oan Amortization) eBook Jan sold her house on December 31 and took a $30,000 mortgage as part of the payment. The 10-year mortgage has a 7% r om nal inte est ate, but it calls o s Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year a. What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent. semiannual payments beginning next June 30 b. How much interest was included in the first payment? Round your answer to the nearest cent How much repayment of principal was included? Do not round intermediate calculations. Round your answer to the nearest cent. How do these values change for the second payment? I. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases I. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal decreases. payment that is applied to interest and the portion of the payment that is applied to principal remains the same throughout the life of the loa The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal al V. The portion of the payment that is applied to interest increases, while so declines the portion of the payment that is applied to principal also increases c. How much interest must Jan report on Schedule B for the first year? Do not round intermedi ate calculations. Round your answer to the nearest cent O Type here to search

Explanation / Answer

a) As $30000 loan is for 10 years then per year payment would be $3000 and since half yearly payments are to be done then $1500 ($3000/2) would be each installment.

b) In first payment, interest is $1050 ($30000x7%/2).

Repayment of principal in first installment was $450 (S1500-$1050).

Values change as per option I, i.e Interest portion declines and principal portion increases.

c) Interest income for the year to be reported as under;

No, her interest income would not remain same for the next year as it would be reducing on account of reduction in the principal outstanding.

d) Since the repayments are being done on semi-annually basis, the principal amount outstanding tends to reduce with each installment and therefore interest on the reduced principal is obviously going to be decrease over the period of time.

opening interest principal total 1st $30,000.00 $1,050.00 $450.00 $1,500.00 2nd $29,550.00 $1,034.25 $465.75 $1,500.00 Total Interest $2,084.25

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