Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 12% and has a carrying value of $16,790.

At year-end, Shonen Knife's borrowing rate has declined; the fair value of the note payable is now $18,340.

(a) Determine the unrealized holding gain or loss on the note. Unrealized Holding Gain or Loss $

(b) Prepare the entry to record any unrealized holding gain or loss.

Question

Business

Francesca Jacobson

6 December, 16:40

Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note was issued at an effective rate of 12% and has a carrying value of $16,790.

At year-end, Shonen Knife's borrowing rate has declined; the fair value of the note payable is now $18,340.

(a) Determine the unrealized holding gain or loss on the note. Unrealized Holding Gain or Loss $

(b) Prepare the entry to record any unrealized holding gain or loss.

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Answers (1)

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Anderson Knapp · Answer 1

(a) $1,550

Explanation:

Given that,

Effective rate of note issued = 12%

Carrying value = $16,790

Shonen Knife's borrowing rate has declined at the year end,

Fair value of the note payable = $18,340

(a) Unrealized holding gain or loss:

= Fair value - Carrying value

= $18,340 - $16,790

= $1,550

(b) The journal entry is as follows:

Unrealized gain or loss-equity A/c Dr.

To notes payable

(To record the unrealized holing loss or gain)