Question

Jan sold her house on December 31 and took a $20,000 mortgage as part of the payment. The 10-year mortgage has a 12% 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. a. What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent. $ b. How much interest was included in the first payment? Round your answer to the nearest cent. $ How much repayment of principal was included? Round your answer to the nearest cent. $ How do these values change for the second payment? The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal decreases. The portion of the payment that is applied to interest and the portion of the payment that is applied to principal remains the same throughout the life of the loan. The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal also declines. The portion of the payment that is applied to interest increases, while the portion of the payment that is applied to principal also increases. c. How much interest must Jan report on Schedule B for the first year? Round your answer to the nearest cent. $ Will her interest income be the same next year? d. If the payments are constant, why does the amount of interest income change over time? As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal increases. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal increases. As the loan is amortized (paid off), the beginning balance, hence the interest charge, declines and the repayment of principal declines. As the loan is amortized (paid off), the beginning balance, hence the interest charge, increases and the repayment of principal declines. As the loan is amortized (paid off), the beginning balance declines, but the interest charge and the repayment of principal remain the same.

Answer 1

As per policy, we cannot able to post solution more than four sub parts of question.

Answer 1

House sold at	20000
Nominal interest rate	12.00%
Number of year	10 years
Discounting rate (12%/2)	6.00%
Number of period (10 years * 2) (1 years = 2 semiannual)	20
What is the dollar amount of each payment Jan receives?
Period	Discounting factor @ 6%
1	0.943396
2	0.889996
3	0.839619
4	0.792094
5	0.747258
6	0.704961
7	0.665057
8	0.627412
9	0.591898
10	0.558395
11	0.526788
12	0.496969
13	0.468839
14	0.442301
15	0.417265
16	0.393646
17	0.371364
18	0.350344
19	0.330513
20	0.311805
Total	11.469921
House sold	20000
Total discount factor @ 6% for 20 semiannually period	11.469921
Dollar amount of each payment receive (20000/11.469921)	1743.69

Answer 2

How much interest was included in the first payment?
Interest included in first payment (20000*6%)	1200

Answer 3

How do these values change for the second payment?
The portion of the payment that is applied to interest declines, while the portion of the payment that is applied to principal increases.
Because interest revenue calculated based on beginning balance of principal. Every cash receipt would be impact on decrease in principal balance. Ultimately, interest revenue decrease due to decrease in principal balance.
Cash receipt includes interest revenue and portion of reduction in principal. Cash receipt same for all the period. Reduction in principal amount increase due to decrease in interest revenue.
Period	Beginning balance of principal	Cash receipt	Interest revenue (beginning balance of principal * 6%)	Reduction in principal (cash receipt - interest revenue)	Ending balance of principal (beginning balance of principal - reduction in principal )
1	20000	1743.69	1200.00	543.69	19456.31
2	19456.31	1743.69	1167.38	576.31	18880.00
3	18880.00	1743.69	1132.80	610.89	18269.10
4	18269.10	1743.69	1096.15	647.54	17621.56
5	17621.56	1743.69	1057.29	686.40	16935.16
6	16935.16	1743.69	1016.11	727.58	16207.58
7	16207.58	1743.69	972.45	771.24	15436.34
8	15436.34	1743.69	926.18	817.51	14618.83
9	14618.83	1743.69	877.13	866.56	13752.27
10	13752.27	1743.69	825.14	918.55	12833.72
11	12833.72	1743.69	770.02	973.67	11860.05
12	11860.05	1743.69	711.60	1032.09	10827.96
13	10827.96	1743.69	649.68	1094.01	9733.95
14	9733.95	1743.69	584.04	1159.65	8574.29
15	8574.29	1743.69	514.46	1229.23	7345.06
16	7345.06	1743.69	440.70	1302.99	6042.07
17	6042.07	1743.69	362.52	1381.17	4660.91
18	4660.91	1743.69	279.65	1464.04	3196.87
19	3196.87	1743.69	191.81	1551.88	1644.99
20	1644.99	1743.69	98.70	1644.99	0.00

Answer 4

How much interest must Jan report on Schedule B for the first year?
From above amortization table, we can get following details.
Period	Interest revenue (beginning balance of principal * 6%)
1	1200.00
2	1167.38
Interest must Jan report on Schedule B for the first year	2367.38