Short and long-term classification of certain assets and liabilities (Part II)

2. Current and non-current portions of long-term loans (debt)

The note payable is a loan which the company obtained to finance its growing operations. The loan requires monthly payments consisting of principal and interest. The loan balance of $3,953 (as of 12/31/20X3) is presented as a long-term liability. The following information pertains to the loan:

Loan start date

4/30/20X3

Loan maturity date

4/30/20X6

Principal

$5,000

Monthly payment*

$150

Interest rate

5%

(*) Monthly payments include principal and interest.

The loan will be paid off via monthly payments. The table below shows the amortization (payment) schedule:

Date

Month

Payment

Interest

Principal

Balance

Apr 20X3

$0

     

$5,000

May 20X3

1

150

21

129

4,871

Jun 20X3

2

150

20

130

4,741

Jul 20X3

3

150

20

130

4,611

Aug 20X3

4

150

19

131

4,481

Sep 20X3

5

150

19

131

4,349

Oct 20X3

6

150

18

132

4,218

Nov 20X3

7

150

18

132

4,085

Dec 20X3

8

150

17

133

3,953

Jan 20X4

9

150

16

133

3,819

Feb 20X4

10

150

16

134

3,685

Mar 20X4

11

150

15

134

3,551

Apr 20X4

12

150

15

135

3,416

May 20X4

13

150

14

136

3,280

Jun 20X4

14

150

14

136

3,144

Jul 20X4

15

150

13

137

3,007

Aug 20X4

16

150

13

137

2,870

Sep 20X4

17

150

12

138

2,732

Oct 20X4

18

150

11

138

2,594

Nov 20X4

19

150

11

139

2,454

Dec 20X4

20

150

10

140

2,315

Jan 20X5

21

150

10

140

2,175

Feb 20X5

22

150

9

141

2,034

Mar 20X5

23

150

8

141

1,892

Apr 20X5

24

150

8

142

1,750

May 20X5

25

150

7

143

1,608

Jun 20X5

26

150

7

143

1,465

Jul 20X5

27

150

6

144

1,321

Aug 20X5

28

150

6

144

1,177

Sep 20X5

29

150

5

145

1,032

Oct 20X5

30

150

4

146

886

Nov 20X5

31

150

4

146

740

Dec 20X5

32

150

3

147

593

Jan 20X6

33

150

2

147

446

Feb 20X6

34

150

2

148

298

Mar 20X6

35

150

1

149

149

Apr 20X6

36

150

1

149

(0)

Total

 

5,395

395

5,000

 

The original balance of $5,000 started off in April 20X3 when the loan was obtained. By making monthly payments, the company reduced the balance to $3,953 (the amount highlighted in light blue) at 12/31/20X3. Each monthly payment of $150 is composed of principal and interest components. The interest component is determined by multiplying the previous month loan balance by the interest rate of 5% and dividing the result by 12 (i.e., division by 12 is needed to apply the monthly interest rate instead of the annual rate).

As the table above shows, during the following 12 months monthly loan payments will reduce the outstanding loan balance by $1,638 (the amounts highlighted in light orange). This amount represents the current portion of the note payable at 12/31/20X3. The reduction in loan principal due to monthly payments after 12/31/20X4 form the non-current portion of the note payable. These amounts are highlighted in light green and total $2,315. Therefore, at 12/31/20X3 the note payable should be split into two portions (current and non-current). The balance sheet below includes this change. Note that a new element is now included in current liabilities and it is titled Current Portion of Long-term Note Payable (highlighted in yellow):

Friends Company
Consolidated Balance Sheet as of December 31, 20X3

ASSETS

Current assets:

 

   Cash and cash equivalents

$3,300

   Accounts receivable

2,900

   Inventories

2,600

   Prepaid expenses

48

      Total current assets

8,848

Property, plant and equipment (at cost)

 

   Buildings

5,000

   Machinery, equipment

8,720

      Less: Allowance for depreciation

(5,500)

   Property, plant and equipment (net)

8,220

Other assets

76

      Total Assets

17,144

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:

 

   Accounts payable

1,600

   Accrued expenses

1,200

   Current portion of long-term note payable

1,638

   Income taxes payable

900

   Deferred rents

20

      Total current liabilities

5,358

Long-term note payable

2,315

Other liabilities

133

Stockholder's equity:

 

   Common stock

1,000

   Paid-in capital

1,850

   Retained earnings

6,488

      Total stockholder's equity

9,338

      Total Liabilities and stockholder's equity

17,144

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