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Mortgage Payable Journal Entry | Instance

Overview

Mortgage payable is a sort of long-term debt that the corporate (or particular person) wants to make use of the actual property because the collateral to safe the loan. Just like the notes payable, the duty of future cost will embrace each principal and curiosity from the date the corporate obtains the loan. Likewise, the corporate must make the journal entry for mortgage payable on the primary day of receiving the money from the loan.

The cost for mortgage payable is often made in an equal quantity in every interval. Likewise, the cost quantity often consists of the curiosity on the unpaid stability and the discount of the principal. Within the journal entry, this would be the debit of expense and legal responsibility account.

Mortgage payable journal entry

When the corporate obtains the mortgage loan, it may possibly make the journal entry with the debit of money account and the credit score of mortgage payable account.

Account Debit Credit score
Money 000
Mortgage payable 000

On this journal entry, solely stability sheet objects shall be affected because the curiosity on mortgage payable which is an expense will solely incur with the passage of time.

When the installment cost is made at later date, the corporate could make the journal entry by debiting mortgage payable and curiosity expense account and crediting money account.

Account Debit Credit score
Mortgage payable 000
Curiosity expense 000
Money 000

On this journal entry, the money cost (credit score) is acknowledged into two parts; one is for curiosity expense (debit) and one other is for discount of mortgage payable (debit).

Instance

For instance, the corporate ABC Ltd. indicators a mortgage loan settlement with a financial institution to borrow $100,000 for 10 years with the curiosity of 5% each year. The corporate is required to make the annual cost of $12,950 every.

What’s the journal entry for mortgage payable on the primary day of receiving the loan and the primary cost of installment?

Answer:

With the mortgage loan info within the instance above, the corporate can have the cost schedule as under:

Yr Mortgage excellent Complete cost Curiosity cost Principal cost
       100,000                      –                –                  –
1          92,050               12,950           5,000            7,950
2          83,702               12,950           4,602            8,348
3          74,936               12,950           4,185            8,765
4          65,733               12,950           3,747            9,204
5          56,069               12,950           3,287            9,664
6          45,922               12,950           2,803          10,147
7          35,267               12,950           2,296          10,654
8          24,080               12,950           1,763          11,187
9          12,334               12,950           1,204          11,746
10                  –               12,950              617          12,334

On the day that the corporate obtains the mortgage loan, it may possibly make the mortgage payable journal entry as under:

Account Debit Credit score
Money 100,000
Mortgage payable 100,000

On this journal entry, the corporate’s liabilities improve by $100,000 along with the whole belongings in the identical quantity.

On the primary cost of the installment, the corporate could make the journal entry for the curiosity expense and the discount of mortgage payable as under:

Account Debit Credit score
Mortgage payable 7,950
Curiosity expense 5,000
Money 12,950

The whole cost of $12,950 is for each principal and curiosity of mortgage payable. Likewise, on this journal entry, the mortgage legal responsibility within the stability sheet decreases (debit) by $7,950 whereas the expense within the revenue assertion improve (debit) by $5,000 for the curiosity on mortgage payable.

It’s helpful to notice that the subsequent cost of mortgage payable that’s due inside one yr needs to be reported within the stability sheet as the present legal responsibility whereas the remaining unpaid principal needs to be reported because the non-current legal responsibility.

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