Mortgages Payable

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.

Accounting procedures

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:

Accounting-for-mortgage-payable

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:

Mortgage-Amortization-Table

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;

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Journal-entries-to-record-mortgage-payable

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.

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