Temple Corporation purchased a piece of real estate,paying $400,000 cash and financing $700,000 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:

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Each monthly payment will include both principal and interest payments. Since the total amount of the note is $700,000 and the interest rate is 15%, the interest expense for the first month will be $700,000 x 15% / 12 months = $8,750. Since the payments are designed to completely repay the debt by the end of the 10th year, each payment will include an increasing amount of principal repayment as the debt gets smaller. Therefore, the amount of interest expense will decrease over time, while the amount of principal repaid will increase. Since the monthly payment remains the same, the portion of each monthly payment representing repayment of principal will increase over time, while the portion representing interest expense will decrease. This means that the monthly payment will be greater than the amount of interest accruing each month.

Temple Corporation Purchased a Piece of Real Estate,paying $400,000 Cash