How should a mortgage loan payable be reported on a classified balance sheet?
A classified balance sheet reports current liabilities separately from long-term liabilities. Usually, a portion of a mortgage loan balance will be a current liability and a portion will be a long-term liability. The principal that will be due within one year of the balance sheet’s date is reported as a current liability. The principal that will be due after one year of the balance sheet date is reported as a long-term liability.
To illustrate, let’s assume that on December 31, 2005 a company has a mortgage loan payable with a principal balance of $400,000. During the year 2006 there will be twelve monthly payments due and each payment is $4,000—for a total of $48,000. The $48,000 to be paid in 2006 consists of $28,000 of interest payments and $20,000 of principal payments. On the company’s December 31, 2005 balance sheet $20,000 will be reported as a current liability, Mortgage Loan Payable, Current Portion. The remaining $380,000 of principal will be reported as a long-term liability, Mortgage Loan Payable, Noncurrent Portion.
Future interest payments are not reported as liabilities. Interest is reported as a liability only after the company incurs the interest expense. For example, let’s assume that the company’s mortgage payments are made on the 28th of each month. On December 28, 2005 the company made its mortgage payment that included the interest through December 28, 2005. On the company’s balance sheet dated December 31, 2005 a current liability will be reported for the interest incurred on December 29, 30, and 31, 2005. (The interest for the year 2006 is not a liability as of December 31, 2005.)
Learn more about the Balance Sheet.
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I find it odd that future interest payments are not included as liabilities. I was a steller student in Accounting in an MBA school while studying MASS COM and being
1. bad at math
2. bad with “keeping the books”
But I got best grades in class because of my ability to conceptualize financial accounting. [whew! braggard]
So, If a company or an individual has EVERY INTENTION of holding on to the loan, the interest should be a liability if it is due for sure in 30 days.
I like how you go into an example on how to report the mortgage loan on the classified balance sheet.
You made it very easy to grasp this concept :>
Thanks,
Mike.
can you please tell me the difference between hiring and lease? its an interview question.
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Well Eric first you need to know the difference between current liabilities(due within a year) and long term liabilities(anything due after 12 mos from now). In the classified balance sheet only next years interest will be included under “current” liabilities, the rest would fall under long term