Question

On January 1, Year 1, Mahoney Company borrowed $175,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $40,900. What is the amount of principal repayment included in the payment made on December 31, Year 1?

Answer 1

The answer is $26,900

Step-by-step explanation:

The interest payment on $175,000 principal is:

8% x $175,000

$14,000

At the end of each year, both principal and interest payment will be paid.

The total payment for December 31, Year 1 is $40,900. Meaning this contains both the principal and interest payment.

So in the light of the above, the principal out of this money will be:

Total amount paid minus interest paid.

$40,900 - $14,000

=$26,900