40. Which of these is an example of proration?
Answer: B
B is an example of proration.
Proration refers to the allocation of expenses or revenues over a period of time, typically when ownership changes hands mid-year. In this case, the seller prepaid an annual fee of $1,000, and since the buyer took ownership halfway through the year, they compensated the seller for their portion of the prepaid fee, which is $500.
A) A home is sold for $100,000. The buyer pays for $80,000 of it with a loan and $20,000 with cash.
This option describes the payment method for purchasing a home but does not illustrate proration. Proration involves the division of payments for expenses based on the time of ownership, which is not applicable here.
B) A seller prepays an annual fee of $1,000. A buyer takes ownership of the property halfway into the year. The buyer pays the seller $500.
This option accurately represents proration. The seller’s prepayment of the annual fee is divided based on the time the buyer occupies the property, reflecting the buyer's responsibility for their share of the fee, which is $500.
C) A borrower takes out a $100,000 loan with a 5% interest. The monthly payment changes every month.
This option discusses a variable loan payment structure but does not involve proration. Proration specifically relates to the sharing of costs over time based on ownership duration, which is not relevant in the context of fluctuating loan payments.
D) Before closing, a buyer takes out a new homeowner's insurance policy for $1,200.
This option describes the procurement of a homeowner's insurance policy but does not involve proration. There is no division of costs over time or any consideration of ownership transfer, which is central to the concept of proration.
Conclusion
The correct answer, B, exemplifies proration by demonstrating how costs are shared proportionally based on the duration of ownership. In contrast, the other options either describe payment methods or financial arrangements that do not pertain to the allocation of expenses over a specific period, thereby failing to meet the definition of proration.