Question

A buyer is to assume a seller's existing loan with an outstanding balance of $20,000 as of the date of closing. The interest rate is 9% and payments are made in arrears with the last payment made on October 1. Closing is set for October 11. What will be the entry on the seller's closing statement? Select one:

a. $150 debit
b. $150 credit
c. $50 credit
d. $50 debit

Answer 1

The correct entry on the seller's closing statement would be a $50 credit, representing the accrued interest on the loan from the last payment date to the closing date.

Step-by-step explanation:

The question pertains to the calculation of interest due on an outstanding loan balance for the period between the last payment date and the date of closing. The last payment was made on October 1, and the closing is on October 11. Since the interest is charged in arrears, we calculate the interest for those 10 days. The annual interest on a $20,000 loan at 9% is $1,800 (which is $20,000 × 0.09). To find the daily interest rate, we divide the annual interest by 365 (assuming a non-leap year), which results in approximately $4.93 per day. Over 10 days, this amounts to roughly $49.32, which can be rounded to $50. Since the payment isn't due yet (payments are in arrears), this $50 is treated as a credit to the buyer on the seller's closing statement.