Question

On December 1, 2014, Crawley Corporation incurs a 15-year $600,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $7,200, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2014. The portion of the second monthly payment made on January 31, 2015, which represents repayment of principal is:

A) $1,200.
B) $1,212.
C) $7,200.
D) $5,988.

Answer 1

The portion of the second monthly payment made on January 31, 2015, which represents repayment of principal is $1,200.

Step-by-step explanation:

To determine the portion of the second monthly payment that represents the repayment of principal, we need to calculate the interest portion of the payment for January 2015. The interest for January would be calculated based on the outstanding principal from December 2014. The outstanding principal from December 2014 would be the original mortgage amount ($600,000) minus the portion of the first monthly payment made in December 2014 that represents repayment of principal. The interest portion of the second monthly payment made in January 2015 would be the total monthly payment ($7,200) minus the interest calculated for January.

To calculate the interest portion for January 2015:

1. 
   
3. Outstanding principal from December 2014 = $600,000 - first monthly payment made on December 31, 2014 (which represents interest for December 2014)
4. 
   
6. Interest portion for January 2015 = Total monthly payment - Interest calculated for January

Therefore, the portion of the second monthly payment made on January 31, 2015, which represents repayment of principal is $1,200. Therefore, the answer is option A) $1,200.