Accounting Chapter

How are Long-Term Notes Payable and Mortgages Payable Accounted For?Learning Objective 1 Journalize transactions for long-term notes payable and mortgages payableYou have learned that long-term liabilities are liabilities that do not need to be paid within one year or within the entity’s operating cycle, whichever is longer. Both long-term notes payable and mortgages payable are common long-term liabilities.

Exhibit F:12-1 Long-term Notes Payable Amortization Schedule

Assume it’s now December 31, 2026, and Smart Touch Learning must make its first installment payment of $5,000 principal plus interest on the note. The company’s accounting clerk will record the following entry:

After the December 31, 2026, entry, Smart Touch Learning owes $15,000 ($20,000 original note amount minus the $5,000 principal paid on December 31, 2026). The company will record similar entries for the three remaining payments using the amounts calculated in the amortization schedule.

Mortgages PayableMortgages payable include the borrower’s promise to transfer the legal title to specific assets if the mortgage isn’t paid on schedule. Mortgages payable are a type of long-term notes payable that are secured with specific assets. Like long-term notes payable, the total mortgages payable amount has a portion due within one year (current) and a portion that is due more than one year from the balance sheet date.F:12-4Commonly, mortgages specify a monthly payment of principal and interest to the lender (usually a bank). The most common type of mortgage is on property—for example, a mortgage on your home. Let’s review an example.Assume that on December 31, 2025, Smart Touch Learning purchases a building for $150,000, paying $49,925 in cash and signing a 30-year mortgage for $100,075, taken out at 6% interest that is payable in $600 monthly payments, which includes principal and interest, beginning January 31, 2026. The following entry is used to record this acquisition:

A partial amortization schedule for 2025 and 2026 is shown in Exhibit F:12-2.

What are Bonds?Learning Objective 2 Describe bonds payableLarge companies need large amounts of money to finance their operations. They may take out long-term loans from banks and/or issue bonds payable to the public to raise the money. Bonds payable are long-term debts issued to multiple lenders called bondholders, usually in increments of $1,000 per bond. For example, a company could borrow $100,000 from one lender (the bank), or it could issue 100 bonds payable, each at $1,000, to 100 different lenders. By issuing bonds payable, companies can borrow millions of dollars from thousands of investors rather than depending on a loan from one single bank or lender. Each investor can buy a specified amount of the company’s bonds.Each bondholder gets a bond certificate that shows the name of the company that borrowed the money, exactly like a note payable. The certificate states the face value, which is the amount of the bond issue. The bond’s face value is also called maturity value, principal, or par value. The company must then pay each bondholder the face value amount at a specific future date, called the maturity date.

All bond certificates include the following bond fundamentals: Face value—The amount the borrower must pay back to the bondholders on the maturity date (also called maturity value, principal amount, or par value).Maturity date—The date on which the borrower must pay the principal amount to the bondholders.Stated interest rate—The interest rate that determines the amount of cash interest the borrower pays and the investor receives each year (also called face rate, coupon rate, or nominal rate).

Types of BondsThere are various types of bonds, including the following: Term bonds—These bonds all mature at the same specified time. For example, $100,000 of term bonds may all mature five years from today.Serial bonds—Such bonds mature in installments at regular intervals. For example, a $500,000, five-year serial bond may mature in $100,000 annual installments over a five-year period.Secured bonds—These bonds give the bondholder the right to take specified assets of the issuer if the issuer fails to pay principal or interest.Debentures—Such bonds are unsecured bonds that are not backed by assets. They are backed only by the creditworthiness of the bond issuer.