Mortgage payable is a type of long-term debt that the company (or individual) needs to use the real property as the collateral to secure the loan. Similar to the notes payable, the obligation of future payment will include both principal and interest from the date the company obtains the loan. Likewise, the company needs to make the journal entry for mortgage payable on the first day of receiving the cash from the loan.
The payment for mortgage payable is usually made in an equal amount in each period. Likewise, the payment amount usually includes the interest on the unpaid balance and the reduction of the principal. In the journal entry, this will be the debit of expense and liability account.
When the company obtains the mortgage loan, it can make the journal entry with the debit of cash account and the credit of mortgage payable account.
In this journal entry, only balance sheet items will be affected as the interest on mortgage payable which is an expense will only incur with the passage of time.
When the installment payment is made at later date, the company can make the journal entry by debiting mortgage payable and interest expense account and crediting cash account.
In this journal entry, the cash payment (credit) is recognized into two portions; one is for interest expense (debit) and another is for reduction of mortgage payable (debit).
For example, the company ABC Ltd. signs a mortgage loan agreement with a bank to borrow $100,000 for 10 years with the interest of 5% per annum. The company is required to make the annual payment of $12,950 each.
What is the journal entry for mortgage payable on the first day of receiving the loan and the first payment of installment?
Solution:
With the mortgage loan information in the example above, the company can have the payment schedule as below:
On the day that the company obtains the mortgage loan, it can make the mortgage payable journal entry as below:
In this journal entry, the company’s liabilities increase by $100,000 together with the total assets in the same amount.
On the first payment of the installment, the company can make the journal entry for the interest expense and the reduction of mortgage payable as below:
The total payment of $12,950 is for both principal and interest of mortgage payable. Likewise, in this journal entry, the mortgage liability in the balance sheet decreases (debit) by $7,950 while the expense in the income statement increase (debit) by $5,000 for the interest on mortgage payable.
It is useful to note that the next payment of mortgage payable that is due within one year should be reported in the balance sheet as the current liability while the remaining unpaid principal should be reported as the non-current liability.