In this project, you’ll create a loan amortization schedule for an example mortgage loan. Imagine the mortgage is for a
nonresidential real property your company has purchased.
The property includes land and a building. Once you’ve created the amortization schedule, you can use it to prepare other financial documents. Your project is divided into several steps for you to follow. Each step includes figures that illustrate the concepts.
Step 1: Create a Loan Amortization Schedule
In this first step of your project, you’ll need to create a loan
amortization schedule. The following table illustrates the payments
and interest amounts for a fixed-rate, 30-year mortgage loan. The total amount of the mortgage is $300,000, and the interest rate is 6 percent. This mortgage requires monthly payments of $1,798.65, with a final payment of $1,800.23. The table was created in Excel.
The following is an explanation of the columns in the table:
■ The first column in the table, with the heading “Payment Number,” shows the 360 payments required to pay off the mortgage loan (30 years, with 12 monthly payments
Payment Number
Payment Amount
6% Interest Expense
Principal Balance
Current
Non-Current
Annual Interest Expense
0 $300,000.00 $3,684.02 $296,315.98 $0
1 $1,798.65 $1,500.00 $298.65 $299,701.35 $3,702.44 $295,998.91
2 $1,798.65 $1,498.51 $300.14 $299,401.21 $3,720.95 $295,680.26
————————————-Break in Sequence————————————-
359 $1,798.65 $17.86 $1,780.79 $1,791.28 $1,791.27 $0
360 $1,800.23 $8.96 $1,791.27 $0 $0 $0 $685.50
Totals $347,515.58 $300,000.00
The second column, with the heading “Payment Amount,” shows the monthly payment amount.
■ The third and fourth columns show the portion of the monthly payment paid for interest, and the portion paid towards the principal.
■ The fifth column, headed “Balance,” shows the starting balance of $300,000, and the remaining balance each month after the principal is subtracted.
■ The sixth column, headed “Current,” reflects the current portion of the principal (12 months).
■ The amounts in the “Non-Current” column are calculated by subtracting the current portion of the principal from the total balance.
■ The “Annual Interest Expense” column provides a running total of the interest expense on the mortgage for the entire 12-month period.
■ The “Totals” under the “6% Interest Expense” and “Principal”
columns show the final totals for the 30-year life of the
Once you’ve determined how each of the amounts in the table are obtained, you can calculate them and fill them in for all 360 payments. Note that the table shows only the figures for the first two payments and the last two payments; you’ll need to calculate the amounts for the remaining payments and fill them in. Once this loan amortization schedule is completely filled in, it
can be printed out and used to prepare other financial statements.
For example, when the first payment of $1,798.65 is
made, the following accounting journal entry would be made
Debit Credit
Mortgage Payable $298.65
Interest Expense $1,500.00
Cash $1,798.65
The balance of this mortgage, after the first payment, is $299,701.35. If a classified balance sheet were prepared on this date, the current portion of the mortgage would be $3,702.44, and the noncurrent portion of the mortgage would be $295,998.91.
Once the monthly schedule is completed, generate an annualized version, using the following preferred format:
Step 2: Create a Depreciation Schedule
The next step in your project is to create a depreciation schedule for the (fictional) property purchased with this loan. When the property was purchased, an appraisal was performed. The property included separate components of land and improvements (the building), and also included some fixtures (appliances, such as a refrigerator). You paid a slightly higher appraisal fee than usual, and instructed the appraiser to provide you with the following breakdown of values:
Graded Project 133
Year Payment
Number Balance Current Non-Current
Annual
Interest
Expense
0 $300,000.00 $3,684.02 $296,315.98 $0
1 12 $296,315.98 $3,911.24 $292,404.75 $17,899.78
2 24 $292,404.75 $4,152.47 $288,252.27 $17,672.56
————————————-Break in Sequence————————————-
28 336 $40,584.10 $19,684.22 $20,899.88 $3,043.13
29 348 $20,899.88 $20,899.88 $0 $1,899.58
30 360 $0 $0 $0 $685.50
Total $347,515.58
The next step in your project is to create a depreciation
schedule for the (fictional) property purchased with this loan. When the property was purchased, an appraisal was performed. The property included separate components of land and improvements (the building), and also included some fixtures (appliances, such as a refrigerator). You paid a slightly higher appraisal fee than usual, and instructed the appraiser to provide you with the following breakdown of values:
Year Payment
Number Balance Current Non-Current
Ann
Appraised
Values Percentage
Land $45,000 14.29%
Improvements $260,000 82.54%
Fixtures $10,000 3.17%
Total $315,000 100.00%
Your mortgage loan cost of $300,000 must be allocated between these different asset classes, so you can use the appropriate depreciable life to prepare a depreciation schedule, as shown in the following illustration:
Now, you’ll need to use the MACRS tables to determine the amount of depreciation expense. Assume that the “improvements” represent 39-year, nonresidential rental property and the “fixtures” represent 7-year property. Create a depreciation schedule using the MACRS tables on pages 308–309 of your textbook. Create annual measures and a source document for annual financial statement preparation. Your textbook didn’t provide a depreciation schedule for the 39-year, nonresidential real property, so we’ve provided one below. The
measures in the table represent the percentage by which the improvements to the real property may be depreciated, per year, based on the month placed in service, which in this case was January:
The amounts in this table are carried out to the third decimal place, so some rounding errors will prevent the improvements from being fully depreciated through year 39. You should prepare the depreciation schedule only through year 30, to match the loan amortization schedule you prepared in Step 1 of the project. To check your work, you can use the following figure, which shows part of the completed depreciation schedule:
Appraised
Values Percentage Cost
Allocation
Land $45,000 14.29% $42,857
Improvements $260,000 82.54% $247,619
Fixtures $10,000 3.17% $9,524
Total $315,000 100.00% $300,000
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1 2.461 2.247 2.033 1.819 1.695 1.391 1.177 0.963 0.749 0.535 0.321 0.107
2
thru
39
2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564 2.564
The amounts in this table are carried out to the third decimal place, so some rounding errors will prevent the improvements from being fully depreciated through year 39. You should prepare the depreciation schedule only through year 30, to match the loan amortization schedule you prepared in Step 1 of the project. To check your work, you can use the following figure, which shows part of the completed depreciation schedule
Year Land Improvements Fixtures Total
1 $0 $6,094 $1,361 $7,455
2 $0 $6,349 $2,332 $8,681
————————————-Break in Sequence————————————-
29 $0 $6,349 $0 $6,349
30 $0 $6,349 $0 $6,349
Total $0 $190,213 $9,524 $199,737
Step 3: Create a Schedule Combining
Interest Expenses and Depreciation
Expenses
In this step, you’ll need to create a schedule that combines interest expenses and depreciation expenses, but only for the first 10 years of the life of the asset. Here is how the completed schedule should appear:
Step 4: Convert the Interest Expense
and Depreciation Expense
In this step of your project, you’ll need to convert the interest expense and depreciation expense from pretax to aftertax dollars. Assume the firm is subject to a 34 percent marginal tax rate, and
Remember from your lessons that operating and interest expense results in a cash outflow, and depreciation expense results in a cash inflow, from the depreciation tax shield. Therefore, in this step, you’re computing a net cash outflow. The following illustration shows how the completed schedule should appear, with the combined annual interest expense and depreciation expense, both converted to aftertax terms.
Step 5: Calculate the Aftertax Cash
Outflows
In this step of your project, you’ll need to calculate the present values and net present values of the aftertax cash flows orexpenses for the project. In this case, this is the present value, aftertax cash outflow.
You’ve calculated the aftertax cash flows for the interest expense and the depreciation expense associated with the purchase of this piece of non-residential real property. Now, the final step requires you to calculate the present value of these ATCFs for each year, and the NPV for these expenses, in aggregate.
Using a discount rate of 10 percent, extend the table completed in Step 4 by adding a column for the present value of ATCFs. You’ll find a “present value of $1” table on pages A-4 and A-5 of your textbook (near the back of the book). The following illustration shows how the completed table should appear.
Year
Pretax
Annual
Interest
Expense
Pretax
Annual
Depreciation
Expense
(a)
AT CF
or
Posttax
(1 – T)
Interest
Expense
(b)
AT CF
or
Posttax
(T)
Depreciation
Expense
(a) – (b)
AT CF
or
Posttax
Combined
Interest &
Depreciation
Expense
1 $17,900 $7,455 $11,814 $2,535 $9,279
————————————-Break in Sequence————————————-
10 $15,271 $6,349 $10,079 $2,159 $7,920
Questions 3 and 4
Your mortgage loan cost of $300,000 must be allocated between
these different asset classes, so you can use the appropriate depreciable life to prepare a depreciation schedule, as shown
in the following illustration:
Appraised
Values Percentage Cost
Allocation
Land $45,000 14.29% $42,857
Improvements $260,000 82.54% $247,619
Fixtures $10,000 3.17% $9,524
Total $315,000 100.00% $300,000
Now, you’ll need to use the MACRS tables to determine the amount of depreciation expense. Assume that the “improvements” represent 39-year, nonresidential rental property and the “fixtures” represent 7-year property. Create a depreciation
schedule using the MACRS tables on pages 308–309 of your
textbook. Create annual measures and a source document for annual financial statement preparation. Your tex
Your textbook
didn’t provide a depreciation schedule for the 39-year, nonresidential
real property, so we’ve provided one below. The
measures in the table represent the percentage by which the improvements to the real property may be depreciated, per year, based on the month placed in service, which in this case was january.
The amounts in this table are carried out to the third decimal
place, so some rounding errors will prevent the improvements from being fully depreciated through year 39. You should prepare the depreciation schedule only through year 30, to
match the loan amortization schedule you prepared in Step 1
of the project. To check your work, you can use the following
figure, which shows part of the completed depreciation schedule:
In this step, you’ll need to create a schedule that combines interest expenses and depreciation expenses, but only for the first 10 years of the life of the asset. Here is how the completed
schedule should appear:
Year Annual
Interest Expense
Annual
Depreciation
Expense
1
$17,899.78 $7,455
—————Break in Sequence—————
10
$15,270.50 $6,349
