Question

Harper Company commonly issues long-term notes payable to its various lenders. Harper has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Harper has elected to use the fair value option for the long term notes issued to Barclay's Bank and has the following data related to the carrying and fair value for these notes December 31, 2017 December 31, 2018 December 31, 2019 Carrying Value $135,000 112,000 90,000 Fair Value $135,000 107.000 97.000

Answer 1

Solution:

a) Adjusting Entries

Date	Account Titles and Explanation	Debit	Credit
December 31,2017	No Entry	$               -
			$               -
December 31,2018	Notes Payable	$ 5,000.00
	Unrealized Holding Gain/Loss		$ 5,000.00
	(Being bond fair value adjusted)
December 31,2019	Unrealized Holding Gain/Loss	$ 7,000.00
	Notes Payable		$ 7,000.00
	(Being bond fair value adjusted)

b) Amount to be reported under Notes Payable for 2018 Harper`s Balance Sheet = $ 107,000

c) Effect of recording the fair value option on notes on Harper`s 2019 Income = Income decrease by $7,000

Note:

1) Any change in fair value option of liabilities will be reflect in the income statement.