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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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Most popular questions from this chapter

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.

(Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying \(50,000 down and agreeing to pay the balance in four equal installments of \)40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.

(Round answers to the nearest cent.)

(a) December 31, 2016. (d) December 31, 2019.

(b) December 31, 2017. (e) December 31, 2020.

(c) December 31, 2018.

Using the same information as in E14-22 and E14-24, answer the following questions related to American Bank (creditor).

Instructions

  1. Compute the loss American Bank will suffer under this new term modification. Prepare the journal entry to record the loss on American’s books.
  2. Prepare the interest receipt schedule for American Bank after the debt restructuring.
  3. Prepare the interest receipt entry for American Bank on December 31, 2018, 2019, and 2020.
  4. What entry should American Bank make on January 1, 2021?

On December 31, 2017, American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, \(3,000,000 note receivable by the following modifications:

  1. Reducing the principal obligation from \)3,000,000 to \(2,400,000.
  2. Extending the maturity date from December 31, 2017, to January 1, 2021.
  3. Reducing the interest rate from 12% to 10%.

Barkley pays interest at the end of each year. On January 1, 2021, Barkley Company pays \)2,400,000 in cash to American Bank.

Instructions

  1. Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring?
  2. Can Barkley Company record a gain under the term modification mentioned above? Explain.
  3. Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring.
  4. Prepare the interest payment entry for Barkley Company on December 31, 2019.
  5. What entry should Barkley make on January 1, 2021?

What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
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