CASE STUDY: INTERPRETING DEBT DISCLOSURES ASSIGNMENT
Lisa Borgese
School of Business, Liberty University
BUSI 532 Advanced Financial Statement Analysis
Dr. Debra Touhey
July 30th, 2023
Introduction
When one analyzes long-term debt, it is important to use the information reported in
the debt and fair value disclosures to assist investors in determining if a company has the
financial resources to pay debt interest and the principal. (Revsine et al., 2020) The focus of this
case study is to interpret the recording and disclosure of debt, such as bond or mortgage notes.
According to Revsine et al., “the use of GAAP or IFRS accounting standards can have a significant
effect on a company’s financial statements, for which the analyst to review.” (Revsine et al.,
2020) With changing interest rates and the value of the bond premium, analysts and investors
may find it more complex when interrupting financial instruments when determining the
financial health of a company.
1. What is the current portion of Potter’s mortgage payable at the end of Year 1?
Potter’s mortgage payable is the company’s liability account that pertains to the unpaid
principal for the mortgage. The amount that Potter corporation must pay in the next twelve
months is recorded on the balance sheet under the current liabilities section. The company’s
consolidated balance sheet shows that the current mortgage payable at the end of year one is
$1,402,000 (Revsine et al., 2020)
2. How much did Potter pay in cash to reduce its mortgage payable during Year 2?
According to Loibl et al., “reducing the mortgage payable is associated with lowering
levels of financial strain and bill paying difficulties.” (Loibl et al., 2020) Companies decide to
lower their mortgage payables, they lower their payments and save on interest on the loan.
According to Revsine, “Potter corporation’s consolidated cash flow statement shows that the
company paid $1,298,000 to reduce their mortgage payable during year two.” (Revsine et al.,
2020)
3. Explain the difference between your answer to requirement 1 and your answer to
requirement 2.
$ (in
thousands)
Current installments on mortgages $
2,747
Payable to bank $
1,794
Industrial development band ($108*4) $
432
Note Payable ($104*4) $
416
Difference $
105
The information provided on the consolidated balance sheet shows that the current
installments on mortgages at the end of year two are $2,747,000. During year two, the payable
to the bank was $1,794,000, which was classified as a current liability. Additionally, there were
quarterly payments on the industrial development bond of $432,000 and notes payable of
$416,000. These payments deducted from the installments on mortgages, for year two, which
left a difference of $105,000.
4. What are the components of the current portion of the mortgage payable as of the end
ofYear 2?
$ (in
thousands)
Remaining note principal $
1,794
Industrial development band $
432
Note payable $
416
Difference $
105
Current Portion $
2,747
5. Prepare a journal entry to record the installment payment and any interest in March 31,
Year 3.
Journal Entry for March 31
Accounts Debit ($) Credit ($)
Current installment on mortgage $
108
Interest $
49
Cash $
157
To calculate interest: Interest = $1,401 * 14% * (1/4) = $49.
Current installments on mortgage and the interest accounts are debited to decrease these
accounts, as payments are made, whereas the cash account is credited, since this asset is used
to make the payments.
6. Prepare a journal entry to record the refinancing of the old note for April 30, Year 3.
Journal Entry for April 30
Accounts Debit ($) Credit ($)
Current installment on mortgage $
1,794
Interest $
63
Mortgage on property $
1,794
Cash $
63
To calculate interest: Interest = $1,794 * 14% * (1/4) = $63.
Since the note was refinanced for April 30, current installments on mortgage and interest are
debited, while mortgage on the property and cash are credited.
7. Prepare a journal entry for April 30, Year 3, assuming the company pays the principalalong
with any remaining interest.
Journal Entry for April 30
Accounts Debit ($) Credit ($)
Current installment on mortgage $
1,794
Interest $
63
Cash $
1,857
If the company pays the principal in full and the remaining interest, they will pay
$1,857,000 in total, in which one will debit principal for $1,794 and debit interest for $63. They
will then credit cash for $1,857 as the other side of the entry.
“The wicked borrows and does not pay back, But the righteous is gracious and gives.”
(Psalm 37:21).
References
English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/
Loibl, C., Moulton, S., Haurin, D., & Edmunds, C. (2020, November 10). The role of consumer
and mortgage debt for financial stress. Taylor Francis Online. Retrieved from
https://www.tandfonline.com/doi/full/10.1080/13607863.2020.1843000.
Revsine, L. (2020). Financial Reporting and Analysis (8th ed.). McGraw-Hill Higher Education
(US). https://bookshelf.vitalsource.com/books/9781264097005
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