Question

Headland Company commonly issues long-term notes payable to its various lenders. Headland has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Headland 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. Any changes in fair value are due to changes in market rates, not credit risk.

		Carrying Value		Fair Value
December 31, 2020		$58,600		$58,600
December 31, 2021		47,000		45,500
December 31, 2022		32,400		34,600

(a) Prepare the journal entry at December 31 (Headland’s year-end) for 2020, 2021, and 2022, to record the fair value option for these notes. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020
Dec. 31, 2021
Dec. 31, 2022

(b) At what amount will the note be reported on Headland’s 2021 balance sheet?

Note to be reported on Headland’s 2021 balance sheet

$

(c) What is the effect of recording the fair value option on these notes on Headland’s 2022 income?

The effect of recording the fair value option would result in unrealized holding                                                           gainloss of

$

Answer 1

Headland Company Requirement a Debit in $ Credit in $ Journal Enteries Date Particulars 31.12.2020 There will be no journal entry because the carrying value of the notes payable is equal to the fair market value. 1500 31.12.2021 Notes Payable a/c Dr. To Unrealized Holding Gain or Loss -Income 47000 - 45500 = 1500 1500 Dr. 2200 31.12.2022 Unrealized Holding Gain or Loss-Income a/c To Notes Payable 34600 - 32400 = 2200 2200 Requirement b Note to be reported on Headland's 2021 balance sheet 45500 Requirement The effect of recording the fair value option would result in unrealized holding Loss of $2200