On December 1, 2017, Crawley Corporation incurs a 15-year $600,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $7,200, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2017. The portion of the second monthly payment made on January 31, 2018, which represents repayment of principal is:

Question

Quizplus · Accepted Answer

The first payment of $7,200 made on December 31, 2017, consists of both principal and interest. The interest component of the payment can be calculated as follows:

Interest = Mortgage balance at the beginning of the month x Monthly interest rate
Monthly interest rate = Annual interest rate / 12 months = 12% / 12 = 1%

For the first payment, the mortgage balance is $600,000, so the interest component is:

Interest = $600,000 x 1% = $6,000

The remaining $1,200 of the payment represents repayment of principal.

On January 31, 2018, the mortgage balance will have been reduced by $1,200, so it will be $598,800. The interest component of the second payment can be calculated as:

Interest = $598,800 x 1% = $5,988

Therefore, the amount of the second payment that represents repayment of principal is:

$7,200 - $5,988 = $1,212.

Hence, the correct answer is B.

On December 1, 2017, Crawley Corporation Incurs a 15-Year $600,000