What is meant by a Mortgage Payable?
A mortgage is a promissory note secured by an asset whose title is pledged to the lender. It is a form of long-term liability. Mortgages generally are payable in equal installments consisting of interest and principal.
To demonstrate the accounting procedures, assume that on January 2, 2019, the Grant Corporation purchases a small building for $1 million and makes a down payment of $200,000. The mortgage is payable over 30 years at a rate of $8,229 monthly. The annual interest rate is 12%, and the first payment is due on February 1, 2019.
Journal entries to record mortgage payable
The journal entry to record the purchase of the building as:
Subsequent entries are based on dividing the monthly payment of $8,229 between principal and interest. A mortgage amortization table can be used for this purpose, and such a table for the first 5 months of 2019 follows:
Each month the total payment of $8,229 is divided into interest and principal. The Interest is based on 1% (12% / 12 months) of the note’s carrying value at the beginning of the month. Therefore, on February the interest is $8,000, or $800,000 x 1% and the principal portion of the payment is thus $229, or $8,229 – $8,000. In March, the interest is $7,998, or 1% of $799,771, and this pattern continues monthly. The journal entry for February 2019 is;
Because most mortgages are payable in monthly installments, the principal payments for the next 12 months following the balance sheet date must be shown in the current liability section as a current maturity of long-term debt. The remaining portion is, of course, classified as a long-term liability.