Question

On January 1, Year 1, the Mahoney Company borrowed $168,000 cash from Sun Bank by issuing a five-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 based on the present value of annuity factor would be $40,725.The amount of principal repayment included in the December 31, Year 1 payment is:Multiple Choice$13,440.$37,467.$40,725.$27,285.

Answer 1

Principal paid= $27,285

Step-by-step explanation:

The loan repayment is structured such that a series of equal periodic installments will be paid for certain number of periods to offset both the loan and the accrued interest. This is called amortization.

The amount of principal = Annual installment - interest due

Annual installment = $40,725

Interest due = interest rate × principal amount

= 8%× 168,000 = $13,440

The amount of principal = $40,725 - $13,440

= $27,285

Answer 2

The correct option is $27,285.

Step-by-step explanation:

Annual interest =$168,000*8%

annual interest =$13,440.00

Annual repayment=$40,725.00

Principal repayment=Annual repayment-interest repayment

principal repayment=$40,725.00-$13,440.00

principal repayment=$ 27,285.00

The correct option is last option.

The first option is wrong because it is the interest repayment,not principal repayment.

The third option is also wrong because it comprises both interest and principal repayments

The option is $37,467 does not feature in the computation in anyway