Question

Coltrane Company has a \(5,000 note payable that is paid in \)1,000 instalments over five years. How would the portion that must be paid within the next year be reported on the balance sheet?

Short answer

The current portion of notes payable would be shown under the current liability in the balance sheet.

Step-by-step solution

Current portion of long-term liability

Long-term liability is the obligation that is payable for more than a year says 5 years or 10 years. But as soon as a portion of the obligation is paid off, long-term liability gradually reduces. That portion that is paid in the current year is called the current portion of long-term liability.

Treatment of the current portion of notes payable in the given case

The note payable is a long-term liability. In the given case long-term liability amounts to $5,000. But this liability is paid off in the annual installment of $1,000.

So next year $1,000 would be payable. This $1,000 would be the current portion of notes payable for next year. As the current portion would be payable only in that year it would be treated as a current liability.

In the given case, this current portion in the balance sheet would be reported under the current liability section, and notes payable would be shown with the reduced balance under long term liability.