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Chapter 14: Q20Q (page 753)

Pierre Company has a 12% note payable with a carrying value of \(20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is \)22,600. Prepare the entry to record the fair value option for this note, assuming

(a) no change in credit risk, and

(b) the change is due to a change in credit risk.

Short Answer

Expert verified

Note payable is $2,600.

Step by step solution

01

Meaning of Fair value

Fair value is the amount that two parties, preferably in an active market, are willing to exchange for an asset or liability. In this case, supply and demand will probably impact the value of the asset under consideration.

02

Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

(a)

Unrealized holding Gain or loss-Income

2,600

Notes Payable

2,600

(b)

Unrealized holding Gain or loss-Equity

2,600

Notes Payable

2,600

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Most popular questions from this chapter

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.

Teton Corporation issued \(600,000 of 7% bonds on November 1, 2017, for \)644,636. The bonds were dated November 1, 2017, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2017, adjusting entry.

Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.

Instructions

  1. Prepare the journal entries on Vargo’s books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust’s books on December 31, 2017, 2018, 2019.

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