Temple Corporation purchased a piece of real estate, paying $4,000,000 cash and financing $7,000,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation:

Question

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The monthly payments are calculated to ensure that the debt is repaid in full by the end of the tenth year, including both principal and interest. Therefore, each payment must cover both principal and interest, with a portion going toward reducing the outstanding debt each month. As the outstanding debt decreases, the portion of each payment representing interest expense will also decrease, while the portion representing repayment of principal will increase. This results in a decreasing interest component of each payment, but because the principal repayment portion is increasing, the total monthly payment amount remains the same throughout the 10-year period. Therefore, Choice A is incorrect. Since the interest component decreases over time, Choice C is also incorrect. The remaining option is B, which correctly reflects the fact that each monthly payment is greater than the amount of interest accruing each month.

Temple Corporation Purchased a Piece of Real Estate, Paying $4,000,000