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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 \(16,000. At year-end, Shonen Knife鈥檚 borrowing rate (credit risk)has declined; the fair value of the note payable is now \)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

鲍苍谤别补濒颈蝉别诲鈥塰辞濒诲颈苍驳鈥塯补颈苍鈥塷谤鈥塴辞蝉蝉=鈥塅补颈谤鈥塿补濒耻别鈭�鈥塩补谤谤测颈苍驳鈥塿补濒耻别=鈥�$17,500鈭�$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

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

Distinguish between the following interest rates for bonds payable:

(a)Yield rate

(b) Nominal Rate

(c) Stated rate

(d) Market rate

(e) Effective rate

On January 1, 2017, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer鈥檚 inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

Instructions


(a) Prepare the journal entry to record the initial transaction on January 1, 2017. (Round all computations to the nearest dollar.)

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery鈥檚 product to this customer occur evenly over the 3-year period.

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?

(Effective-Interest Method) Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-line method. She has come to you with the following problem, looking for help.

On June 30, 2017, Hobart Company issued \(2,000,000 face value of 11%, 20-year bonds at \)2,171,600, a yield of 10%. Hobart Company uses the effective-interest method to amortize bond premiums or discounts. The bonds pay semiannual interest on June 30 and December 31. Prepare an amortization schedule for four periods.
See all solutions

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