Definition of Current Portion of Long Term Debt (CPLTD)
Current portion of long term debt (CPLTD) means that part of Long term debt or liability which is to settle down within a period of a year and it is recognized separately from the long term liability and shown on the liability side of the balance sheet under the head Current liabilities which helps to generate confidence and trust among the interested parties that the organization is able to settle down the short term dues on the due date.
CPLTD means that part of non-current liability which is going to mature or due within one year. For example, suppose if the company borrow $ 1,000,000 for a period of 10 years, so $ 1,000,000 is shown as Long term liability on the liability side of the balance sheet. But, if there is an obligation on the company to pay $ 100,000 within one year so this $ 100,000 is shown separately in the balance sheet as the current portion of long term debt(CPLTD) under the head current liabilities and the remaining $ 900,000 as long term liability on the liability side of the balance sheet under the head Non – current liabilities.
To check the liquidity (the ability of a company to convert the asset into cash with ease)of the organization, the parties deal with organizations like creditors, investors compare the CPLTD figure with the liquid assets (cash, bank balance) and make sure that whether the organization has adequate money or equivalent to settle down the short term liability on the due date.
If CPLTD < Liquid Assets, then it is a favorable condition. In this condition, investors may invest in the company, or creditors may provide credit to the company.
If CPLTD > Liquid Assets, then investors and creditors might be at high risk. So, in this condition, they may remove their investments from the company, and creditors may not ready to provide more credit or loans to the company.
Reducing Current Portion of Long Term Debt
Sometimes the company with a good credit rating wants to keep their liabilities as long term. So to reduce the current portion of long term liability, the company either pays the Current portion of long term debt with available cash or borrow a fresh loan at the low-interest rate and pay off the CPLTD portion.
For example, The long term liability in a company is $500,000, out of which the CPLTD portion is assumed to be $100,000.So, instead of recognizing this portion of $100,000 as a current liability, the company may borrow a fresh long term loan and settle down $100,000 immediately. In this case, CPLTD is not booked in the balance sheet, and only long term liability(existing loan + fresh loan taken to pay off the CPLTD portion of the existing loan) is recorded. Alternatively, the company may also pay the CPLTD portion with available cash. In this case, CPLTD is also not coming into the picture. This will reduce the long term liability balance on the liability side and cash balance on the asset side of the balance sheet.
Current Portion of Long Term Debt on Balance Sheet
Current portion of long term debt is shown separately from long term liability on the liability side of the balance sheet under the head current liabilities.
Suppose a company named GDS owes $500,000 at the beginning of the year for 10 years, payable in 10 installments of $50,000 per year. As $50,000 is payable within 12 months, out of $500,000, so $50,000 is booked as the current portion of long term debt under the head current liabilities and the remaining $450,000 ($500,000-$50,000) as long term debt under the head Non-Current Liabilities (Ignoring the calculation of interest).Hereunder the extract of the Balance Sheet at the end of the first year:
Extract of Balance Sheet of GDS Udhyog At the end of the first year
|Liabilities and Shareholder’s Equity|
|Non -current Liabilities|
|Long term debt||450,000.00|
|Total Non -current Liabilities||450,000.00|
|Current portion of the long term debt||50,000.00|
|Total Current Liabilities||50,000.00|
|Total shareholder’s equity and liabilities||500,000.00|
|Cash and Cash Equivalents||500,000.00|
|Total Current Assets||500,000.00|
Recording of Current Portion of Long Term Debt
Let’s understand how to record CPLTD. Suppose the company borrow $20,000 at the beginning of the year for five years, payable in 5 installments of $4,000 each year. So, at the beginning of the first year(year of borrowing), the company will recognize $20,000 as long term liability. The journal entry is as follows:
|Cash A/c Dr.||20,000|
|To Account Payable(long term liability)||20,000|
|(Being long term loan borrowed)|
Now,$4,000 is payable within one year, so $4,000 out of $20,000 is transferred to CPLTD under the head current liability. The journal entry is as follows.
|Account Payable(long term liability) Dr.||4,000|
|To CPLTD (current liability)||4,000|
|(Being a current portion of long term transferred to Current liability)|
At the end of the year, the CPLTD portion is paid off, and the entry is:
|CPLTD (current liability) Dr.||4,000|
|(Being a current portion of long term paid)|
And every year, the same process will follow.
Impact of CPLTD
If the Company recognize the Current portion of long term debt separately in the balance sheet, 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 take financial decisions easily. Also, in case the company has a high amount of CPLTD and a small cash position, then it shows that higher risk of the default is there from the company’s side, and with this, lenders in the market may decide that further credit will not be given to the company and at the same time investor may also sell their share considering the high chances of default by the company.
Thus, the current portion of long-term debt is that portion of long-term liability that is to be paid within one year. It is shown separately in the balance sheet under the head current liabilities. The amount of CPLTD is credited under the head CPLTD, and this will reduce the balance of long term liability. It shows the liquidity position of the business in a fair manner. In some cases, where the company cannot fulfill the terms and conditions of the long-term loan, the borrower has the right to call off the whole amount of the loan. In this condition, the whole outstanding loan amount is converted into a current portion of long term debt. This will depict a fair view of the financial position of the company.
This is a guide to the Current Portion of Long Term Debt. Here we also discuss the definition and reduce the current portion of long-term debt and the impact of CPLTD. You may also have a look at the following articles to learn more –