13 On August 1, 2006, ABC Company borrowed $400,000 to finance the purchase of a
ID: 2459862 • Letter: 1
Question
13
On August 1, 2006, ABC Company borrowed $400,000 to finance the purchase of a building. The terms of the mortgage require payments of $2,100 to be made at the end of every month with the first payment being due on August 31, 2006. The length of the mortgage is thirty years, and the mortgage carries an annual interest rate of 5%. The amount of interest expense that ABC Company would report in its 2006 income statement related to this mortgage would be closest to:
A) $2,184.80
B) $6,655.81
C) $8,246.83
D) $8,315.21
E) $8,938.76
Explanation / Answer
Formula for loan amortization = A= [i*P*(1+i)^n]/[(1+i)^n-1] Amt $ A = periodical installment P=Loan amount = 400,000 i= interest rate per period =5/12= 0.416670% per month n=total no of payments 360 months A= 0.004167*400000*(1.004167)^360/(1.004167^360-1) A =2147.3 So The monthly installement is $2147.30 Loan Amortization schedule for 2006. Date Installement Interest Principal Balance principal Aug 31.2016 $ 2,147.30 1,666.68 480.62 399,519.38 Sep 30.2016. $ 2,147.30 1,664.68 482.62 397,854.70 Oct 31.2016. $ 2,147.30 1,657.74 489.56 396,196.96 Nov 30.2016. $ 2,147.30 1,650.83 496.47 394,546.13 Dec 31.2016. $ 2,147.30 1,643.96 503.34 392,902.17 Total 8,283.89 So the interest expense in 2016 is close to $ 8246.83 . Ans is Option C
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