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Chapter 14: Q14BE (page 754)

Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued 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

(a) Unrealized holding gain is $1,500.

(b) The total for both debit and credit sides is $1,500.

Step by step solution

01

Meaning of Unrealized Gain

Unrealized gainis a gain that the investor does not actually receive. It accrues because of apositive change in assets’ value. It leads to an increase in the book value of assets.

02

Part (a) Calculation of unrealized holding gain or loss on the note

Particular

Amount

Fair-Value of note Payable at Year-end

$17,500

Less: Carrying Value

$(16,000)

Unrealized holding Gain

$1,500

03

Part (b) Journal Entry

Date

Accounts and Explanation

Debit

Credit

Unrealized Holding Gain

$1,500

Bonds Payable

$1,500

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Most popular questions from this chapter

Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?

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(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?

What disclosures are required relative to long-term debt and sinking fund requirements?

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