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On Oct.31, 20X1, Havert Company incurs a 20-year $500,000 mortgage liability in conjunction with the purchase...

On Oct.31, 20X1, Havert Company incurs a 20-year $500,000 mortgage liability in conjunction with the purchase of a factory. This is payable in equal monthly installments of $5,000 which include interest computed at an annual rate of 9%. The first monthly payment is made on November 30, 20X1. This mortgage is fully amortizing over 240 months. Round.

-Compute interest expense for the first monthly payment

-Compute the principal repayment for the first payment.

-Compute interest expense for the second payment.

-Compute the principal repayment for the second payment.

-What is the total outstanding liability at Dec. 31, 20X1?

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Answer #1

Solution:

interest expense for the first monthly payment = $500,000 * 9%*1/12 = $3,750

Principal repayment for the first payment = $5,000 - $3,750 = $1,250

Interest expense for the second payment = ($500,000 - $1,250) * 9%*/12 = $3,741

principal repayment for the second payment = $5,000 - $3,741 = $1,259

Outstanding liability at Dec 31, 20X1 = $500,000 - $1,250 - $1,259 = $497,491

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