Sunland Company commonly issues long-term notes payable to its
various lenders. Sunland has had a pretty good credit rating such
that its effective borrowing rate is quite low (less than 8% on an
annual basis). Sunland 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 | $51,800 | $51,800 | ||
December 31, 2021 | 42,100 | 40,600 | ||
December 31, 2022 | 36,300 | 38,300 |
(a) Prepare the journal entry at December 31
(Sunland’s year-end) for 2020, 2021, and 2022, to record the fair
value option for these notes.
(b) At what amount will the note be reported on Sunland’s 2021 balance sheet?
(c) What is the effect of recording the fair value
option on these notes on Sunland’s 2022 income?
(a) | Date | Account Titles and Explanation | Debit | Credit |
Dec. 31, 2020 | No Entry | $0 | ||
No Entry | $0 | |||
Dec. 31, 2021 | Notes Payable | $1,500 | ||
Unrealized Holding Gain/Loss - Net Income | $1,500 | |||
(42,100 - 40,600) | ||||
Dec. 31, 2022 | Unrealized Holding Gain/Loss -Net Income | $3,500 | ||
Notes Payable | $3,500 | |||
(38,300 - 36,300 + 1,500) | ||||
(b) | $40,600 | |||
(c) | The effect of recording the fair value option would result in the unrealized holding of loss | $3,500 | ||
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