Current Portion of Long-Term Debt Overview, Calculation, and Example

PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. In personal finance, DSCR refers to a ratio used by bank loan officers in determining debt servicing ability. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.

Let’s assume that a company has just borrowed $100,000 and signed a note requiring monthly payments of principal and interest for 48 months. Let’s also assume that the loan repayment schedule shows that the monthly what is payroll accounting principal payments for the 12 months after the date of the balance sheet add up to $18,000. The current liability section of the balance sheet will report Current portion of long term debt of $18,000.

Short/Current Long-Term Debt Account: Meaning, Overview, Examples

The common view of this situation based on this method of
calculation is that George’s business is illiquid and he won’t be able
to repay his loan. Once you have viewed this piece of content, to ensure you can access the content most relevant https://online-accounting.net/ to you, please confirm your territory. These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license. And of course, just because the DSCR is less than 1 for some loans,
this does not necessarily mean they will default.

For example, on June 19, 2008, a popular
US rating agency, Standard & Poors, reported that it lowered its credit
rating on several classes of pooled commercial mortgage pass-through
certificates originally issued by Bank of America. The rating agency
stated in a press release that it had lowered the credit ratings of
four certificates in the Bank of America Commercial Mortgage Inc.
2005–1 series, stating that the downgrades «reflect the credit
deterioration of the pool». They further go on to state that this
downgrade resulted from the fact that eight specific loans in the
pool have a debt service coverage (DSC) below 1.0x, or below one
times. Interests and lease payments are true costs resulting from taking loans or borrowing assets. Paying down the principal of a loan does not change the net equity/liquidation value of an entity; however, it reduces the cash an entity processes (in exchange of decreasing loan liability or increasing equity in an asset).

Example of Current Portion of Long-Term Debt

Right from
the start of his business, George has a negative level of working
capital. Moreover, with no inventory and no accounts receivable (since
even credit cards clear in a day), George will have a negative working
capital for the next five years. CPLTD means that part of non-current liability will mature or be due within one year.

Payment of CPTLD is mandatory according to the loan agreement the company signed with its lender.

How Do You Calculate CPLTD?

The Debt Service Coverage Ratio (sometimes called DSC or DSCR) is a credit metric used to understand how easily a company’s operating cash flow can cover its annual interest and principal obligations. However, DSCR measures last year’s depreciation expense against next
year’s loan repayment. A superior DSCR would pit next year’s
depreciation expense—calculated as CPFA—against next year’s loan repayment.

In that case, it will reduce the long term liability balance and increase its CPLTD balance with the value of CPLTD. At the time of settlement of the CPLTD portion, the CPLTD balance is debited, and cash or bank balance is credited. This bifurcation of Accounts between CPLTD and long-term liability is very useful for the interested parties to understand the company’s liquidity position in a better way and make financial decisions easily. The current portion of long-term debt (CPLTD) is the amount of unpaid principal from long-term debt that has accrued in a company’s normal operating cycle (typically less than 12 months). It is considered a current liability because it has to be paid within that period. CPAs and auditors have an advantage over lenders and security
analysts because they have access to the necessary raw data—the
schedule of next year’s depreciation—needed to calculate CPFA and a
correct current-period ratio.

Reducing the Current Portion of Long Term Debt

Current liabilities are those a company incurs and pays within the current year, such as rent payments, outstanding invoices to vendors, payroll costs, utility bills, and other operating expenses. Long-term liabilities include loans or other financial obligations that have a repayment schedule lasting over a year. Eventually, as the payments on long-term debts come due within the next one-year time frame, these debts become current debts, and the company records them as the CPLTD. The decision going forward is not which of the two new ratios is
more useful. Indeed, the greatest insight comes when the two ratios
yield opposite indications.

• In financial modeling, it may be necessary to produce a full set of financial statements, including a balance sheet where the current portion of long-term debt is shown separately.
• It outlines the total amount of debt that must be paid within the current year—within the next 12 months.
• Some management teams elect to use cash on hand to support some or all of that CAPEX (meaning it’s not funded by debt, which would be captured in the denominator of the DSC ratio).
• However, that approach implies that CPLTD will be repaid from the
  conversion of current assets into cash.
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In this example, if we assume the taxi has a five-year useful life,
George will “use up” one-fifth of the taxi each year to generate cash
revenue (a different expected life only changes the calculations, not
the concepts). The “current portion” of the taxi, the CPFA, thus is
$5,000 (or $25,000 divided by five years). In the notes to the financial statements the net amount of long term debt shown in the balance sheet would be explained as follows.

Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. For MM, part of the flows(called Current portion) like installment repayment can be handled seperately from the deal itself(different VC).

Banks and lenders often use a minimum DSCR ratio as a condition in the covenant, and a breach can sometimes be considered an act of default. In this regard, it is also important to ensure that the Current Portion of Long-Term Debt is classified correctly so that the users of financial statements can clearly understand the company’s cash flow position. This tends to be an important tool for the creditors, as well as investors in terms of gauging the liquidity position of the company, as well as their ability to meet their day-to-day expenses. The balance sheet below shows that the CPLTD for ABC Co. as of March 31, 2012, was $5,000. As this is a relatively small amount, it is likely the company is making payments as scheduled. The schedule of payments would be included in the notes to the financial statements.

There are different kinds of debt, both short- and long-term debt. In this article, we look at what short/current long-term debt is and how it’s reported on a company’s balance sheet. It correctly captures the concept that
the use of the fixed asset generates revenue that is used to repay the
CPLTD.

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This situation may not be sustainable and may
suggest that the mix of short-term and long-term debt is not optimal. Only by using the measures together is a more comprehensive
understanding of liquidity possible. The current period ratio (Solution 2) is therefore the closer
substitute for the old current ratio.