Question

On January 1, 2016, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $500,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2016?

Select the correct answer.

a. $34,835.70

b. $34,834.00

c. $34,837.40

d. $34,839.10

e. $34,840.80

Answer 1

Loan amount on Jan 01, 2016 = $500,000

Monthly Interest rate = Nominal Interest rate/12 = 7%/12 = 0.5833%

Calculating the Monthly Loan payment using Excel "PMT" function:-

So, Monthly payment is $3326.51

Now, Preparing the amortization table for 12 month payment to determine the Interest Tax deduction for 2016:-

Year	Beg bal.	Payment	Interest amount	Principal Amount	End Bal.
1	500,000.00	3,326.51	2,916.67	409.84	499,590.16
2	499,590.16	3,326.51	2,914.28	412.23	499,177.92
3	499,177.92	3,326.51	2,911.87	414.64	498,763.28
4	498,763.28	3,326.51	2,909.45	417.06	498,346.23
5	498,346.23	3,326.51	2,907.02	419.49	497,926.74
6	497,926.74	3,326.51	2,904.57	421.94	497,504.80
7	497,504.80	3,326.51	2,902.11	424.40	497,080.40
8	497,080.40	3,326.51	2,899.64	426.87	496,653.53
9	496,653.53	3,326.51	2,897.15	429.36	496,224.16
10	496,224.16	3,326.51	2,894.64	431.87	495,792.29
11	495,792.29	3,326.51	2,892.12	434.39	495,357.90
12	495,357.90	3,326.51	2,889.59	436.92	494,920.98
			34,839.10

So, the Interest Tax deduction for 2016 is $34,839.10

Option D

Note- The following Columns are calculated based on:

- Interest amount = beg. Balnace*Monthly interest rate

- Principal maount = Payment - Interest amount

- End Bal. = Beg. Bal + Interest - Payment

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