Question

Jan sold her house on December 31 and took a $30,000 mortgage as part of the payment. The 10-year mortgage has an 11% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.

What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent.

How much interest was included in the first payment? Round your answer to the nearest cent.  

How much repayment of principal was included? Do not round intermediate calculations. Round your answer to the nearest cent.

How much interest must Jan report on Schedule B for the first year? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Calculating dollar amount of each payment

As payments for loan or mortgage are made every six months, so

Semi annual interest rate = nominal interest rate / 2 = 11% / 2 = 5.50%

No of payment or half years in loan = 2 x no of years of loan = 2 x 10 = 20

PMT function in excel can be used to find dollar amount of each payment Jan Receives

Formula to be used in excel: =PMT(rate,nper,-pv)

Using PMT function in excel, we get dollar amount of each payment Jan receives = 2510.3799 = $2510.38 (rounded to nearest cent)

Hence dollar amount of each payment Jan receives = $2510.38

Calculating interest included in first payment

Outstanding balance at the beginning of first half year of loan = loan or mortgage = $30000

Interest included in first payment = Interest for first half year of loan = Outstanding balance at the beginning of first half yearof loan x semi annual interest rate = 30000 x 5.5% = 1650

Hence Interest included in first payment = $1650.00

Calculating Principal included in first payment

Principal included in first payment = Dollar amount of each payment Jan received - interest included in first payment = 2510.38 - 1650 = 860.38

Principal included in first payment = $860.38

Calculating Amount of interest for first year to report on Schedule B

Outstanding balance at the end of of first half year of loan = Outstanding balance at the beginning of first half year of loan - Principal for first payment = 30000 - 860.38 = 29139.62

Outstanding balance at the end of of first half year of loan = Outstanding balance at the beginning of of second half year of loan = 29139.62

Interest included in second payment = Outstanding balance at beginning of second half year loan x semi annual rate = 29139.62 x 5.5% = 1602.6791

Amount of interest to be reported in Schedule B in first year =Total interest for first year of loan = Interest included in first payment + Interest included in second payment = 1650 + 1602.6791 = 3252.6791 = $3252.68 (rounded to nearest cent)

Amount of interest to included in Schedule B in first year = $3252.68