200012 Lecture Notes - Lecture 21: Chattel Mortgage, Property Law, Personal Property
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Argue either in favor or against the estate tax. Then, respond to at least two other students' posts in the following manner:
Support one studentâs argument with additional information or examples.
Counter one studentâs argument with information and/or examples.
Student 1 answer : Samantha
Samantha Caterina 5 posts
Re:Module 7 DQ 2
The estate tax is very tricky, it can be argued both ways, for and against. For arguments sake I would be in favor of the estate tax. Currently for 2017 the federal estate tax threshold is 5.49 million. This is only targeting the wealthiest of people. The estate tax will tax any amount of an estate above this. It makes up for a small portion of the total tax collected by the federal government but it is still a substantial amount. The estate tax can be different in each state therefore being taxed more if the threshold is smaller. It is argued that the successful decedent should not be penalized for being successful I would not agree this is true. They are no longer the owner of the estate and the money would just be passed to a beneficiary. The beneficiary then has the rights to do what they please with the money. This can cause the beneficiaries to become non-productive members of society. If the estate tax was taken out tax would have to be made up somewhere, therefore cause middle class taxpayers to pay more taxes. The estate tax does not target the average person only the wealthiest are affected by it. I do not think the estate tax needs to be taken out of order.
https://www.forbes.com/sites/kellyphillipserb/2014/10/06/guest-post-pros-and-cons-of-the-federal-estate-tax/#6e3c8eb975a6
Student answer Andrea:
Andrea Robinson-Parker 4 posts
Re:Module 7 DQ 2
The estate tax was once known as the death tax, there is a pun in there somewhere. Firstly, it is associated with the inheritance of a dead relative and secondly, it can be the death of small family businesses. I believe that this tax is essential for our country to survive. Bob Rywick, in his article, Pros and Cons of the Federal Estate Tax argues both sides of the coin. I agree with his pro stance and here is why:
Revenue from the estate tax will create around $200 billion revenue in the next several years. There has been a great increase in wealth in the recent past and this number may climb.
The estate tax will help to dilute the concentration of wealth. This concentration can be damaging to our free democratic society.
Many wealthy people donate large sums to charities each year to lower their tax bracket. If there was no estate tax, these donations would most likely drop off significantly.
Small business, (making less than $5,000,000) will not be affected. There are also rules set in place to protect farms regarding the valuation of farm land.
Less than 2/10 of 1% of the descendants dying each year will be affected by this tax, based on the current exemption amount.
Lastly, I personally believe that estate planning can alleviate some of these taxes. Estate taxes should not be confused with gift taxes. This is an option that can protect inheritances.
Student Answer
Lakisha Minniefield 3 posts
Re:Module 7 DQ 2
I am against âestate taxâ and feel that when the property value goes up, it will increase my mortgage payment each year. I agree with Justin Haskins article regarding scrapping property taxes because as a property owner, charging fees for a specific service should be allowable. Also, property owners should be able to choose where the property taxes should be allocated especially when it comes down to our public education. I have two children who are autistic and in the past it was very difficult to find a school who had the staff to supply all of their educational special needs. Even though we live in the best neighbors that were very costly, the schools zone in the area had 2 out of 10 rating so I would have to transfer my children our of the district in order to get better services. Currently, my husband is getting ready for retirement out of the military and we have looked at all 50 states within the United States to see which state would give us the most exemptions when purchasing a home. The state we chose to move back to is Texas because of the no state property taxes. Property tax for the state of Texas brings in the most money of all taxes available to local government to pay for schools, roads, police and firemen, emergency response services, libraries, parks and other services provided by local government. The state also has a variety of partial or total (absolute) exemptions from appraised property values used to determine local property taxes. A partial exemption removes a percentage or a fixed dollar amount of a property's value from taxation. A total (absolute) exemption excludes the entire property from taxation. Since we will be on a fixed income, Texas property tax exemptions for disabled veterans was the best out of all 50 states. However, we will still have to look for a county with low property tax rate. Since I am already a disabled veteran, Texas has a property tax exempt chart for qualifying disabled veterans.
The exemption amount that a qualified disabled veteran receives depends on the veteran's disability rating from the branch of the armed service.
| Disability Exemption | |
| Disability Rating | Exemption Amount Up To |
| 10% to 29% | $5,000 from the property's value |
| 30% to 49% | $7,500 from the property's value |
| 50% to 69% | $10,000 from the property's value |
| 70% to 100% | $12,000 from the property's value |
*The Texas Comptroller website lists all of the benefits for disabled veterans regarding property tax exemptions.
Even as a disabled veteran, I would still have to pay property tax but the exemption will only exempt the amount of the disability rating off the value of property. Disabled veterans who are 100% total and permanently disable will be exempt from paying all property taxes. Financially, my family will still have to find a home affordable in a safe neighborhood, public education is rated above 7 out of 10 and choose a county that property taxes are low.
Reference:
https://www.comptroller.texas.gov/taxes
Step 1: Create a Loan Amortization Schedule In this first stepof your project, youâll need to create a loan amortizationschedule. The following table illustrates the payments and interestamounts for a fixed-rate, 30-year mortgage loan. The total amountof the mortgage is $300,000, and the interest rate is 6 percent.This mortgage requires monthly payments of $1,798.65, with a finalpayment of $1,800.23. The table was created in Excel. The followingis an explanation of the columns in the table:
â The first column in the table, with the heading âPaymentNumber,â shows the 360 payments required to pay off the mortgageloan (30 years, with 12 monthly payments per year).
| 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 |
ââââââââââââ-Break in Sequenceââââââââââââ-
| 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 |
| Total | $347,515.58 | $300,000.00 |
â The second column, with the heading âPayment Amount,â showsthe monthly payment amount.
â The third and fourth columns show the portion of the monthlypayment paid for interest, and the portion paid towards theprincipal.
â The fifth column, headed âBalance,â shows the starting balanceof $300,000, and the remaining balance each month after theprincipal is subtracted.
â The sixth column, headed âCurrent,â reflects the currentportion of the principal (12 months).
â The amounts in the âNon-Currentâ column are calculated bysubtracting the current portion of the principal from the totalbalance.
â The âAnnual Interest Expenseâ column provides a running totalof the interest expense on the mortgage for the entire 12-monthperiod.
â The âTotalsâ under the â6% Interest Expenseâ and âPrincipalâcolumns show the final totals for the 30-year life of themortgage.
Once youâve determined how each of the amounts in the table areobtained, you can calculate them and fill them in for all 360payments. Note that the table shows only the figures for the firsttwo payments and the last two payments; youâll need to calculatethe amounts for the remaining payments and fill them in. Once thisloan amortization schedule is completely filled in, it can beprinted out and used to prepare other financial statements. Forexample, when the first payment of $1,798.65 is made, the followingaccounting journal entry would be made:
Debit Credit
Mortgage Payable $298.65
Interest Expense $1,500.00
Cash $1,798.65
Notice that the amounts of principal and interest in thisjournal entry would change for each and every payment. Whenoriginated, the journal for the loan was created as shown here:
Debit Credit
Fixed AssetâReal Property $300,000
Mortgage Payable $300,000
The balance of this mortgage, after the first payment, is$299,701.35. If a classified balance sheet were prepared on thisdate, the current portion of the mortgage would be $3,702.44, andthe noncurrent portion of the mortgage would be $295,998.91. If youwere to create a chart of the interest and principal components ofeach mortgage payment, over the life of the mortgage, it would looklike the following illustration:
Mortgage Principal and Interest
Interest Components of Interest
Principal Component of Payments
360 Monthly Payments
Once youâve completed the amortization schedule for this loan,youâll be able to create loan amortization schedules for your ownhome mortgage, automobile loan, personal loans, and so on. You caneven create a pro forma report that shows the effects of additionalprincipal payments on the life of your loan (this assumes you donâthave a prepayment penalty, which is typically the case). You may besurprised at the effects a modest additional principal payment hason the life of a loan.
Once the monthly schedule is completed, generate an annualizedversion, using the following preferred format:
| 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 |
ââââââââââââ-Break in Sequenceââââââââââââ-
| 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 |
Step 2: Create a Depreciation Schedule
The next step in your project is to create a depreciationschedule for the (fictional) property purchased with this loan.When the property was purchased, an appraisal was performed. Theproperty included separate components of land and improvements (thebuilding), and also included some fixtures (appliances, such as arefrigerator). You paid a slightly higher appraisal fee than usual,and instructed the appraiser to provide you with the followingbreakdown of values:
| 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 betweenthese different asset classes, so you can use the appropriatedepreciable life to prepare a depreciation schedule, as shown inthe following illustration:
| Appraised Values | Percentage | Cost Allocation | |
| Land | $45,000 | 14.29% | $42,857 |
| Improvement | $260,000 | 82.54% | $247,619 |
| Fixtures | $10,000 | 3.17% | $9,524 |
| Total | $315,000 | 100.00% | $300,000 |
Now, youâll need to use the MACRS tables to determine the amountof depreciation expense. Assume that the âimprovementsâ represent39-year, nonresidential rental property and the âfixturesârepresent 7-year property. Create a depreciation schedule using theMACRS tables on pages 308â309 of your textbook. Create annualmeasures and a source document for annual financial statementpreparation. Your textbook didnât provide a depreciation schedulefor the 39-year, nonresidential real property, so weâve providedone below. The measures in the table represent the percentage bywhich the improvements to the real property may be depreciated, peryear, based on the month placed in service, which in this case wasJanuary:
| Year | Jan | Feb | March | April | May | June | July | Aug | Sept | 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 decimalplace, so some rounding errors will prevent the improvements frombeing fully depreciated through year 39. You should prepare thedepreciation schedule only through year 30, to match the loanamortization schedule you prepared in Step 1 of the project. Tocheck your work, you can use the following figure, which shows partof 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 |
ââââââââââââ-Break in Sequenceââââââââââââ-
| 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 andDepreciation Expenses
In this step, youâll need to create a schedule that combinesinterest expenses and depreciation expenses, but only for the first10 years of the life of the asset. Here is how the completedschedule should appear:
| Year | Annual Interest Expense | Annual Depreciation Expense |
| 1 | $17,899.78 | $7,455 |
âââââBreak in Sequenceâââââ
| 10 | $15,270.50 | $6,349 |
Step 4: Convert the Interest Expense and DepreciationExpense
In this step of your project, youâll need to convert theinterest expense and depreciation expense from pretax to aftertaxdollars. Assume the firm is subject to a 34 percent marginal taxrate, and convert the 10-year schedule of interest expense anddepreciation expense to aftertax terms. Review Lesson 3, Assignment9, to obtain the applicable formulas.
Remember from your lessons that operating and interest expenseresults in a cash outflow, and depreciation expense results in acash inflow, from the depreciation tax shield. Therefore, in thisstep, youâre computing a net cash outflow. The followingillustration shows how the completed schedule should appear, withthe combined annual interest expense and depreciation expense, bothconverted to aftertax terms.
| Year | Pretax Annual Interest Expense | Pretax Annual Depreciation Expense | (a) AT CF or Posttax (1 â T) Interest Expense | (b) AT CF or Posttax (T) Depreciation Expense | (a) â (b) AT CF or Posttax Combined Interest & DepreciationExpense |
| 1 | $17,900 | $7,455 | $11,814 | $2,535 | $9,279 |
ââââââââââââ-Break in Sequenceââââââââââââ-
| 10 | $15,271 | $6,349 | $10,079 | $2,159 | $7,920 |
Step 5: Calculate the Aftertax Cash Outflows In this step ofyour project, youâll need to calculate the present values and netpresent values of the aftertax cash flows or expenses for theproject.
In this case, this is the present value, aftertax cash outflow.Youâve calculated the aftertax cash flows for the interest expenseand the depreciation expenseassociated with the purchase of this piece of non-residential realproperty. Now, the final step requires you to calculate the presentvalue of these ATCFs for each year, and the NPV for these expenses,in aggregate. Using a discount rate of 10 percent, extend the tablecompleted in Step 4 by adding a column for the present value ofATCFs. Youâll find a âpresent value of $1â table on pages A-4 andA-5 of your textbook (near the back of the book). The followingillustration shows how the completed table shouldappear.
| Year | Pretax Annual Interest Expense | Pretax Annual Depreciation Expense | (a) AT CF or Posttax (1 â T) Interest Expense | (b) AT CF or Posttax (T) Depreciation Expense | (a) â (b) AT CF or Posttax Combined Interest & DepreciationExpense | 10% PV Factor | PV ATCFs |
| 1 | $17,900 | $7,455 | $11,814 | $2,535 | $9,279 | 0.9091 | $8,436 |
ââââââââââââ-Break in Sequenceââââââââââââ-
| 10 | $15,271 | $6,349 | $10,079 | $2,159 | $7,920 | 0.3855 | $3,053 |
| Total | $166,896 | $72,757 | |||||
| NPV | $53,068 |
Evaluation Criteria Your instructor will use the followingcriteria to evaluate your project: Step 1: Create the loanamortization schedule for the property. (20 points) Step 2: Createthe depreciation schedule. (20 points) Step 3: Create the schedulethat combines interest expenses and depreciation expenses. (20points) Step 4: Create a schedule that converts the interestexpense and depreciation expense to aftertax dollars. (20 points)Step 5: Create a schedule that shows the aftertax cash outflows.(20 points)
