What is the mortgage payable and what does the mortgage payable on balance sheet look like? In this article by Viindoo Enterprise Management Software, we will take a closer look at the mortgage payable, including what it is, how it is calculated, and why it matters.
What is Mortgage Payable on Balance Sheet?
Mortgage payable is a type of long-term debt that is used to finance the purchase of property or other assets. The borrower (also known as the mortgagor) agrees to make regular payments over a set period of time, typically with interest, until the loan is fully repaid. The lender (also known as the mortgagee) uses the property or asset as collateral for the loan.
A mortgage payable on balance sheet is a liability recorded on the balance sheet that represents the amount of money a company owes to a lender for a mortgage. This liability is typically long-term, meaning it will not be paid off within the next year.
What is mortgage payable and how it appears on the balance sheet
Factors Affecting Mortgage Payable on the Balance Sheet
Several factors can affect a company's mortgage payable balance sheet, including:
- Interest Rates: The interest rate on the mortgage payable affects the amount of interest that the company must pay over the life of the loan. Higher interest rates can result in higher mortgage payable amounts.
- Property Value: The value of the property or asset that the company purchases using the mortgage payable impacts the balance sheet. The higher the value, the higher the mortgage payable.
- Economic Conditions: Economic conditions such as inflation, unemployment, and interest rates can impact a company's ability to repay its debt obligations, leading to higher mortgage payable accounts.
- Debt Repayment Schedule: The repayment schedule for the mortgage payable affects the amount of principal and interest that the company must pay each period. Longer repayment schedules can result in higher mortgage payable accounts.
There are several factors affecting mortgage payable account
How to Record Mortgage Payable on the Balance Sheet?
To record a mortgage payable on the balance sheet, a company must first determine the total amount of the mortgage loan. This will include the principal amount of the loan as well as any interest that has accrued. The company will then need to determine the length of the loan and the interest rate.
Once the terms of the mortgage have been established, the accounting entries can be made to record the mortgage payable on the balance sheet. The initial entry will be a debit to the asset account, such as "Property, Plant, and Equipment," for the amount of the property or asset being purchased. This will be balanced by a credit to the liability account "Mortgage Payable."
As payments are made towards the mortgage, the company will need to record the reduction in the mortgage payable on the balance sheet. Each payment made will involve a debit to the "Mortgage Payable" account and a credit to the "Cash" account, reflecting the reduction in the liability and the use of cash to make the payment.
How to record mortgage payable on the balance sheet of the company
Example of Company's Mortgage
ABC Corporation decides to purchase a new office building for $1 million and takes out a mortgage loan with a 10-year repayment period and an interest rate of 5%. The monthly mortgage payment is $10,610.
At the time of purchase, ABC Corporation's balance sheet would reflect the following:
- Office Building (Asset) = $1,000,000
- Mortgage Payable (Liability) = $1,000,000
Each month, when ABC Corporation makes its mortgage payment, the following transactions occur:
- Cash (Asset) = -$10,610
- Interest Expense (Expense) = $4,167
- Mortgage Payable (Liability) = -$6,443
As ABC Corporation continues to make payments towards the mortgage loan, the mortgage payable balance on its balance sheet decreases each month. After 5 years, its balance sheet might look like this:
- Office Building (Asset) = $1,000,000
- Accumulated Depreciation (Asset) = -$250,000
- Mortgage Payable (Liability) = $614,360
Why Does Mortgage Payable on the Balance Sheet Matter?
Here are some of the key reasons why the mortgage payable balance sheet matters:
Why it is important to understand mortgage payable on the balance sheet
Reflect Company's Debt Management
A high mortgage payable over time can indicate that the company is taking on a significant amount of debt to finance its operations. This could be a cause for concern if the company is not generating enough revenue to cover its debt obligations. On the other hand, a low mortgage payable account may indicate that the company is managing its debt responsibly, which can be a positive signal for investors.
Impact Credit Rating
Mortgage payable can also impact a company's credit rating. A high level of debt can make lenders hesitant to lend them additional funds, as it may be seen as a high risk. A low mortgage payable can be viewed as a safer investment and may lead to favorable lending terms. Thus, companies need to maintain a healthy balance sheet and manage their debt obligations efficiently.
Indicate the Company's Financial Health
Mortgage payable is an important factor that investors and stakeholders consider when assessing a company's financial health. A high mortgage payable may signal that the company is struggling financially, while a low balance sheet can indicate a strong financial position. This can affect the company's stock prices and overall reputation in the market.
The mortgage payable on the balance sheet can reflect the company’s financial health
FAQs
How does refinancing a mortgage affect the mortgage payable on balance sheet?
Refinancing a mortgage means taking out a new loan to pay off the existing mortgage. The new loan will appear as a liability on the balance sheet, while the old mortgage payable account will be reduced or eliminated.
Can a mortgage payable on balance sheet be prepaid?
Yes, some mortgage loans can be prepaid without penalty. However, it is important to check with the lender beforehand to avoid any fees or penalties.
Is a mortgage payable on balance sheet considered a long-term or short-term liability?
A mortgage payable on balance sheet is considered a long-term liability because the repayment period typically exceeds one year.
Mortgage payable on balance sheet is crucial evidence for the company's ability to manage debt. Hopefully, this article by Viindoo helps investors and stakeholders better understand what mortgage payable is, how it is calculated, and why it matters. Therefore, investors and stakeholders can better assess a company's financial health and make informed decisions about investing or lending.
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