Question

Jan sold her house on December 31 and took a $15,000 mortgage as part of the payment. The 10-year mortgage has a 11% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of interest that was included in the two payments she received during the year.

a. What is the dollar amount of each payment Jan receives? Round your answer to the nearest cent.

b. How much interest was included in the first payment? Round your answer to the nearest cent.

How much repayment of principal was included? Round your answer to the nearest cent.

c. How much interest must Jan report on Schedule B for the first year? Round your answer to the nearest cent.

Answer 1

a. To calculate the perodic payments, use the formula:

, where:

• r = rate per period = 11%/2 = 5.50%,
• n = number of periods = 10*2 = 20
• PV = principal amount of mortgage = $15000

Payment = (0.055*15000)/(1-((1+0.055)^-20)) = 1255.19

b. Interest amount included = (15000*0.055) = $825.00

Principal repaid = 1255.19-825 = $430.19

c. As per Schedule B of IRs Form 1040, in case of self-financed mortgage, any amount of interest received on the mortgage needs to be reported in the Schedule B.

During the first year, Jan will receive 2 payments (One on June 30 and another on Dec 31), the interest portion of these payments are:

• For June 30 = $825.00
• For Dec 31 = (0.055*(15000-430.19)) = 801.34

Total interest reported in year 1 = 825+801.34 = $1,626.34

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