3. On December 1, year 1, Newton Corporation incurs a 15-year $300,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $3,600, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, year 1. The portion of the second monthly payment made on January 31, year 2, which represents repayment of principal is:

Question

3. On December 1, year 1, Newton Corporation incurs a 15-year $300,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $3,600, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, year 1. The portion of the second monthly payment made on January 31, year 2, which represents repayment of principal is:

Answer 1

To determine the portion of the second monthly payment made on January 31, year 2, which represents the repayment of principal, we need to understand how mortgage payments are typically structured.

In general, mortgage payments are divided into two components: interest and principal repayment. In the early years of a mortgage, a larger portion of the payment goes towards paying the interest, while the remaining amount goes towards reducing the principal.

Given that the mortgage is a 15-year loan with monthly payments of $3,600, and an interest rate of 12% per year, we can calculate the monthly interest payment and the remaining amount that goes towards the principal repayment.

Step 1: Calculate the monthly interest payment:
Interest Rate per month = 12% / 12 = 1% per month
Monthly Interest Payment = Mortgage Balance at the beginning of the month * Interest Rate

Step 2: Calculate the principal repayment portion:
Principal Repayment Portion = Monthly Payment - Monthly Interest Payment

Step 3: Calculate the mortgage balance at the end of each month:
Mortgage Balance at the end of the month = Mortgage Balance at the beginning of the month - Principal Repayment Portion

Now let's go through the calculations to find the principal repayment portion of the second monthly payment made on January 31, year 2:

1. For the first monthly payment on December 31, Year 1:
- Mortgage Balance at the beginning = $300,000
- Monthly Interest Payment = $300,000 * 1% = $3,000
- Principal Repayment Portion = $3,600 - $3,000 = $600
- Mortgage Balance at the end of December 31, Year 1 = $300,000 - $600 = $299,400

2. For the second monthly payment on January 31, Year 2:
- Mortgage Balance at the beginning = $299,400
- Monthly Interest Payment = $299,400 * 1% = $2,994
- Principal Repayment Portion = $3,600 - $2,994 = $606

Therefore, the portion of the second monthly payment made on January 31, Year 2, which represents repayment of principal is $606.