How to Calculate Interest Expense on Long Term Debt

Long-term debt is an obligation to pay a loan that will not be completed for at least 12 months. Examples of long-term debt include mortgage loans and many car loans. Businesses track long-term liabilities separately from short-term liabilities to assist them with the correct financial reporting, and to give a clearer picture of the overall health of the business. The interest on long-term debt represents a significant liability for the business, and therefore must be monitored carefully.

Simple Interest Loan

List the balance of the debt on the balance sheet for the business at the amount of money that would settle the debt in full were it paid that day. The balance may be included in a summary of all other long-term debts, generally listed as long-term liabilities.

Multiply the annual percentage rate for the debt by the balance of the loan. The result is the interest expense for the year. If the interest accrues at the beginning of the year, or the beginning of the loan term, make a debit entry to the interest expense account, and a credit entry to the interest payable account to reflect the fact that the business has incurred interest.

Multiply the interest for the year by how many years you have to repay the note. This assumes that the note does not amortize. If you pay off an amount of the loan each year, subtract that payoff from the balance and compute the interest based on the new balance. Do this calculation for each year of the loan. The total of the interest from all years is the total long-term interest expense.

Compound Interest Loan

Set up a spreadsheet with columns labeled period and interest rate per period, as well as beginning balance and payment. Label two more columns as interest amount per period and ending principal balance. Sequentially number a row in the period column to correspond to the number of compounding periods in the loan. A 60-month compounding period would have the numbers 1-60 in that column, one per row. Calculate the amount of interest charged per compounding period by dividing the annual percentage rate expressed as a decimal by the number of compounding periods per year. For example, a 6 percent APR loan would have a 0.5 percent rate per compounding period. In this case, you would enter 0.005 in the percent per compounding period column for each row

Enter the current principal balance in the first column under beginning balance. Enter the payment for that period in the payment column and subtract the payment from the beginning balance. Multiply this result by the interest rate per period, and enter that amount in the interest amount per period column. Subtract the payment from the current balance, and add the interest to that amount, entering the total in the ending balance column. Move the entry for ending balance to the current balance column in the next row.

Repeat this process for each row numbered to correspond with an amortization period. When completed, add all of the interest expense per period entries. The total is your total long term interest expense on this loan.

Complete the same process for each long-term loan that you have. Add all of the long-term interest expenses together to reveal your total long-term debt interest expense.

Tips

  • Use a software package or website that calculates loan amortization to make this process easier.

Warnings

  • Do not post long-term interest expenses before the interest has accrued. This will cause errors in financial reporting for the business and understate the actual business profits for an accounting period.

References

About the Author

Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.