Able Electronics Company issues a $1000000 8% 20-year mortgage note on January 1. The terms provide for annual installment payments exclusive of real estate taxes and insurance of $101852. After the first installment payment the principal balance is
A) $1000000.
B) $920000.
C) $978148.
D) $898148.

Question

Quizplus · Accepted Answer

The annual installment payment of $101852 is calculated as follows:
PVIFA(8%, 20 years) = 9.8189
$1,000,000 / 9.8189 = $101,852
After the first payment of $101852, the principal balance will be:
$1,000,000 - $101,852 = $898,148
Therefore, the correct answer is (C) $978148. The annual installment payment of $101,852 can be broken down into interest and principal payments. In year 1, the interest payment will be:
$1000000 x 0.08 = $80,000

Subtracting the interest from the annual payment gives the principal payment:
$101,852 - $80,000 = $21,852

This means that after the first installment payment, the remaining principal balance on the mortgage note would be:
$1000000 - $21,852 = $978,148

Therefore, the correct answer is choice C.

Able Electronics Company Issues a $1000000 8% 20-Year Mortgage Note