What is the year-end change in Debt balance after repaying 10% of the principal?

What is the year-end change in Debt balance after repaying 10% of the principal?

• A. Debt is down by $10
• B. Debt is up by $10
• C. Debt unchanged
• D. Debt is down by $5

Answer: (A)

When you repay principal, the liability itself decreases by the amount repaid. A 10% repayment reduces the debt balance by 10% of the original principal. If the principal were $100, that repayment is $10, so the year-end debt balance is down by $10. Interest payments don’t reduce the principal, so they don’t affect the debt balance in that way. Therefore, the debt decreases by $10.

When you repay principal, the liability itself decreases by the amount repaid. A 10% repayment reduces the debt balance by 10% of the original principal. If the principal were $100, that repayment is $10, so the year-end debt balance is down by $10. Interest payments don’t reduce the principal, so they don’t affect the debt balance in that way. Therefore, the debt decreases by $10.