Reference no: EM132421854

Problem: On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $1.86 million by paying 260,000 down and borrow the remaining $1.60 million with a 5 percent loan secured by the home. The Franklins paid interest only on the loan for year 1 and year 2 (unless stated otherwise). (Enter your answers in dollars and not in millions of dollars. Do not round intermediate calculations. Leave no answer blank, Enter zero if applicable.)

Required:

Question 1: What is the amount of interest expense the Franklins may deduct in year 2 assuming year 1 is 2017?

Question 2: What is the amount of interest expense the Franklins may deduct in year 2 assuming year 1 is 2018?

Question 3: Assume that year 1 is 2018 and that in year 2, the Franklins pay off the entire loan but at the beginning of year 3, they borrow $330,000 secured by the home at a 5 percent rate. They make interest-only payments on the loan during the year. What amount of interest expense may the Franklins deduct in year 3 on this loan? (Assume the Franklins do not use the loan proceeds to improve the home.)