Question

Martinez Company commonly issues long-term notes payable to its various lenders. Martinez has had a pretty good credit rating such that its effective borrowing rate is quite low less than 8% on an annual basis Martinez 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 December 31,2017 December 31,2018 December 31, 2019 Carrying Value Fair Value $50,700 $50,700 47,600 46,000 38,500 40,400 (a) Prepare the journal entry at December 31 (Martinez's year-end) for 2017,2018, and 2019,to record the fair value option for these notes. (If no entry is required, select "No Entry" for the account titles and enter O 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. 31,2017 Dec. 31,2018 Dec. 31,2019 (b) At what amount will the note be reported on Martinez's 2018 balance sheet? Note to be reported on Martinez's 2018 balance sheet $ (c) What is the effect of recording the fair value option on these notes on Martinez's 2019 income? The effect of recording the fair value option would result in unrealized holding #of$

Answer 1

(a)	Date	Account Titles and Explanation	Debit	Credit
	31-Dec-17	No Entry	0
		No Entry		0
	31-Dec-18	Notes Payable ($47600 - $46000)	$ 1,600
		Unrealized holding gain or loss - Income		$   1,600
	31-Dec-19	Unrealized holding gain or loss - Income ($40400 - $38500 + $1600)	$ 3,500
		Notes Payable		$   3,500
(b)	Note to be reported on Martinez's 2018 balancesheet		=	$ 46,000
(c)	The effect of recording the fair value option would result in unrealized holding loss of $3500