Expert: Doug Ingram - 3/18/2008

Question
I am having trouble doing a balance sheet for a mortgage investment
I am setting up a company that will invest 35mm: $17.5mm in Year 1 and $17.5mm in Year 2 in 15 year 8.5% mortgages.

3.5mm reserve fund will be invested short term at 6%
=$210,000
Year 1 $17.5mm uninvested proceeds invested for 1 yr at 6%
=$1,050,00

Amortization from Year 1-$603,609*- invested at 6%
=$36,217

P&L Yr 1
Mtge portfolio interest 1,464,344
Inv Income              1,296,217 ($210k,1,050mm,36,217)
Total Income            2,760,561
Exp                       700,000
Net Income              1,010,561

Should I deduct $603,609 amortization on the P&L?
If so, what do I do on the balance sheet.  Right now I ignored it on the P&L

Balance Sheet

Current Assets   1,296,217 (interest)  Current Liabities 0

Lg Term Asssets 16,896,391(yr end bal) Stockholders Equity
                                      Common   35,000,000
                                      Preferred 3,500,000
                                     ?Retained E1,010,561
I must be doing something fundamentally wrong.  I can't get the two sides to balance

Thanks for any help. I'm sooooo frustrated  

Answer
Sorry - we were on spring break!  I didn't totally proof this, but you should get the idea.  Basically you have investment accounts but need a CASH account for flows!

The interest and principal received from your investments are sitting in cash on the balance sheet (pending other investments).

You have 603,609 and 2,076,197 on the asset side (in cash).
Total Assets = 40,576,197

Your investments earned:
1,464,344 (mtge interest)
 215,872 (reserve fund)          [without compounding $  210,000]
1,079,362 ($17.5MM pending)       [without compounding $1,050,000]
  16,618 (on principal paydown)  [not 36216 - but as received]
2,776,197
-700,000  (less expenses)
2,076,197 earned and in retained earnings

Total assets :   40,576,196.84
Mtge outs    16,896,390.91
Pending inv    17,500,000.00
Res inv             3,500,000.00
Cash               603,609.09
Cash from int     2,776,196.84
Cash out for exp   (700,000.00)

Total Liab & Cap:40,576,196.84
Common            35,000,000.00
Pref             3,500,000.00
Retained E     2,076,196.84


You receive the 603,609 over 12 months
You earn 0 in month 1 and then compound interest on each payment after month 1 (11 months of cash flow interest)
You could approximate better with 603,609 / 2 x 6% x 11/12, but you should do actual monthly.