Question

Blended payment loans require a loan amortization schedule separating principal and interest. This is required, in part, because

A) interest only is reflected on the cash flow statement.

B) interest and principal needs to be reflected under current and not current liabilities section of the statement of financial positon.

C) the interest expense is recorded separately from the reduction of the loan payable.

D) none of the above.

Answer 1

Solution:

Option C: The Interest expense is recorded separately from the reduction of the loan payable.

Explanantion:

Blended payment loan required a loan amortization schedule separating principal and interest because Interest has to be ascertained separately and it has its own separate recognition in the income statement.

Loan is a liability which is reported under notes loans payable or any other similar head on the Company’s Balance sheet. So this head in the balance sheet only contains the principal amount. Interest amount is not included in the balance sheet, it is to be reported in the income statement as an expense.

Now the question arises, why there is such a loan amortization schedule.

Blended loan payments are equal monthly payments of principal and interest over the loan period.

This installment amount( Principal+Interest) remains same throughout the loan period. Even the installment amount is same, the amount of Principal and interest changes by every instalment. Interest decreases and Principal amount increases by every instalment. This changes require us to compute Interest amount and Principal amounts frequently. So overcome such a work , a loan amortization schedule is prepared. This is will enable recognize correct Interest amount in the Income statement and correct principal amount in the balance sheet.

So Option C is correct.

Option A is not correct because Not only interest, Principal payment is also reflected in the Cash flow statement under Cash flow from financing activities.

Option B is not correct Because Interest is not always reflected in the balance sheet statement. It will reflect in balance sheet only when it is not paid during the period or say, when it is payable. There is no need to show interest which is already paid in the balance sheet.

Option D "none of the above" is not correct because Option C is correct.