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Chapter 12: 12BE (page 610)

Question: Michek Company loans Sarasota Company \(2,000,000 at 6% for 3 years on January 1, 2017. Michek intends to hold this loan to maturity. The fair value of the loan at the end of each reporting period is as follows.

December 31, 2017 \)2,050,000

December 31, 2018 2,020,000

December 31, 2019 2,000,000

Prepare the journal entry(ies) at December 31, 2017, and December 31, 2019, for Michek related to these bonds, assuming (a) itdoes not use the fair value option, and (b) it uses the fair value option. Interest is paid on January 1.

Short Answer

Expert verified

Unrealized holding income on December 31, 2017, is $50,000

Step by step solution

01

Definition of Loan

When a lender lends money to a borrower, this is known as a loan.

02

When Fair Value Option is not chosen

Date

Description

Debit

Credit

December 31, 2017

Loan

$50,000

Unrealized Holding Income

$50,000

Being year-end adjustment entry of fair value.

On December 31, 2019, the value of the loan was $2,000,000, which is the same as on January 1, 2017. Hence, there is no unrealized gain or loss, so no entry will pass in this situation.

03

When the Fair value option is chosen

Date

Description

Debit

Credit

December 31, 2017

Fair Value Adjustment

$50,000

Unrealized Holding Income

$50,000

Being year-end adjustment entry of fair value.

On December 31, 2019, the value of the loan was $2,000,000, which is the same as on January 1, 2017. Hence, there is no unrealized gain or loss, so no entry will pass in this situation.

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Most popular questions from this chapter

What is the fair value option?

Kenoly Corporation owns a patent that has a carrying amount of \(300,000. Kenoly expects future net cash flows from this patent to total \)210,000. The fair value of the patent is $110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.

In examining financial statements, financial analysts often write off goodwill immediately. Comment on this procedure.

The following is a list of items that could be included in the intangible assets section of the balance sheet.

1. Investment in a subsidiary company.

2. Timberland.

3. Cost of engineering activity required to advance the design of a product to the manufacturing stage.

4. Lease prepayment (6 months’ rent paid in advance).

5. Cost of equipment obtained.

6. Cost of searching for applications of new research findings.

7. Costs incurred in the formation of a corporation.

8. Operating losses incurred in the start-up of a business.

9. Training costs incurred in start-up of new operation.

10. Purchase cost of a franchise.

11. Goodwill generated internally.

12. Cost of testing in search for product alternatives.

13. Goodwill acquired in the purchase of a business.

14. Cost of developing a patent.

15. Cost of purchasing a patent from an inventor.

16. Legal costs incurred in securing a patent.

17. Unrecovered costs of a successful legal suit to protect the patent.

18. Cost of conceptual formulation of possible product alternatives.

19. Cost of purchasing a copyright.

20. Research and development costs.

21. Long-term receivables.

22. Cost of developing a trademark.

23. Cost of purchasing a trademark.

Instructions:

(a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.

(b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

In 2016, Austin Powers Corporation developed a new product that will be marketed in 2017. In connection with the development of this product, the following costs were incurred in 2016: research and development costs \(400,000, materials and supplies consumed \)60,000, and compensation paid to research consultants $125,000. It is anticipated that these costs will be recovered in 2019. What is the amount of research and development costs that Austin Powers should record in 2016 as a charge to expense?
See all solutions

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