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Chapter 14: Q13BE (page 754)

BE14-14 (L04) Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note wasissued at an effective rate of 11% and has a carrying value of \(16,000. At year-end, Shonen Knife’s borrowing rate (credit risk)has declined; the fair value of the note payable is now \)17,500. (a) Determine the unrealized holding gain or loss on the note.(b) Prepare the entry to record any unrealized holding gain or loss.

Short Answer

Expert verified

The unrealized holding loss on the note is $1,500

Step by step solution

01

Meaning of Accounting Entry

The accounting entry is assumed as the formal document that records the business transactions. The accounting entry can also be called the journal entry. The recording of the journal entries is the first step.

02

(a) Determination of unrealized holding gain or loss

Unrealised holding gain or loss= Fair value− carrying value= $17,500−$16,000=$1,500

The unrealised loss is $1,500

03

Step3:(b) Preparation of adjusting journal entry for unrealizable holding loss

Shonen Knife Corporation

Journal entry

Date

Account and explanation

Debit $

Credit $

Unrealized losses

1500

Notes payable

1500

(To the fair value loss of $1500 on notes payable is recorded)

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