Long term liabilities

Journal entry for long term notes payable

• * on January 10, Murad Buildings company signed a 20 000$ note payable, it is due to 5 annual payments of 4000$ and 10% interest each year.
• Cash 20 000$
• long-term note payable 20 000$
• An amortization schedule details company’s each loan, all payments including principal, interest and the beginning and ending balance of this loan.
• In order to find the interest expense, beginning balance multiply by interest rate and year.

Journal entry for long term notes payable

Long term notes payable amortization schedule

• When a business takes long-term loan, an accountant will prepare amortization schedule of this loan with showing payments and interest expenses over the term of the loan.

	Beginning balance	Principal payment	Interest expense	Total payment	Ending balance
10.01.2019					20 000$
10.01.2020	20 000$	4000$	2000$	6000$	16000$
10.01.2021	16000$	4000$	1600$	5600$	12000$
10.01.2022	12000$	4000$	1200$	5200$	8000$
10.01.2023	8000$	4000$	800$	4800$	4000$
10.01.2024	4000$	4000$	400$	4400$	-
Total		20000$	6000$	26000$

Long term notes payable amortization schedule

Long term notes payable

• Accountant records journal entry in 10.01.2020

Data	Accounts and explanation	Debit	Credit
2020
10 January	Notes payable	4000$
	Interest expense	2000$
	Cash		6000$
Paid principal and interest expenses for the first year.

Long term notes payable

Mortgages payable

• A mortgage payable is the long-term debt of a property owner to pay a loan that is secured by property.
• This loan is almost same with notes payable. The only difference is that mortgage payable are secured with the asset unless borrowers pay off all his loan.
• Nowadays individuals (families) or companies can get mortgage loan from banks.
• A mortgage agreement is contract between a borrower and the lender

Mortgages payable

Mortgage payable

• Example. Samarkand Restaurant buys a building for 100 000$ paying 30 000$ cash and signing a 10 year mortgage for 70 000$ at 10% on March 20 2019.

Data	Accounts and explanation	debit	credit
2019
March 20	Building	100 000$
	Cash		30000$
	Mortgage payable		70000$
Purchased building with cash and mortgage contract

Mortgage payable

Recording mortgage payment

• A mortgage borrower should pay the mortgage payment monthly basis.
• Let’s count mortgage loan and interest expense for the first month. On April 20, 2019, principal payment for first month would be:
• 70 000$/10years/12months=583,3$
• Interest expense for first month:
• 70 000$*10%*1/12=583,3$
• Journal entry:

Mortgage payable 583,3$

• Interest expense 583,3$
• Cash 1 166,6$

Recording mortgage payment

Bonds payable

• Bonds payable- long term debt account which contains the amount owed to bond holders by the issuer.
• Face value – amount of money a borrower must pay back to the bondholders at the end.

Bonds payable

Types of bond

• Treasury bonds – issued by the U.S. government are generally called treasuries. It has highest level of security.
• Municipal bonds – issued by state and local governments to fund the construction of schools, housing, highways and other important infrastructure projects.
• Corporate bonds – issued by the corporations to fund a large capital investment and a business expansion. It has the higher risk.

Types of bond

Bond price

• A bond can be issued at any price agreed upon by the issuer and the bondholders.
• A bond may have 3 types of price.
• - Face value
• - discount on bonds payable
• This is a price which issue price is less than face value.
• - premium on bond payable
• In this bond, issue price is above face value.

Bond price

Issuing bonds payable at face value

• The a Hotel has 100$ of 10% bonds payable which mature in 3 years. The company issued this bond to other company at face value on May 1. 2018

Data	Accounts and explanation	Debit	credit
2018
May 1	Cash	100$
	Bonds payable		100$
Issued bonds at face value

Issuing bonds payable at face value

Issuing bond payable at a discount

• Imagine the same Hotel issues 100$ of 10%, 3 year bonds at 98%. But at this moment market interest rate is higher. That’s why we assume that company receives only 98% from the 100$.

Data	Accounts and explanation	debit	credit
2018
May 1	Cash	98$
	Discounts on bonds	2$ (100-98)
	Bonds payable		100$

Issuing bond payable at a discount

Issuing bonds payable at premium

• When the stated rate is larger than market rate, company can sell the bond for premium price. Demand is higher for this bond. Therefore company can make some additional money through issuing this bond. The same BBB company issued 100$ bond payable with 10% for 3 years. We assume that market rate is 9% and company receives 105$ from bondholders.

Data	Accounts	debit	credit
2018
May 1	Cash	105$
	Premium on bonds payable		5$ (105-100)
	Bonds payable		100$

Issuing bonds payable at premium

Retirement of bond payable

• Retirement of bond payable – paying the face value of the bond.
• Bonds usually can be retired at the maturity date.
• The BBB company after 3 years must pay 100$ face value to the bondholders (we assume that all interest expenses has been paid already) and transaction will be as below:

Data	Accounts	debit	credit
2021
May 1	Bonds payable	100$
	Cash		100$
Retired bonds payable at maturity

Retirement of bond payable

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