Question

   Exercise 14-19 Pearl Company commonly issues long-term notes payable to its various lenders. Pearl has...


  
Exercise 14-19
Pearl Company commonly issues long-term notes payable to its various lenders. Pearl has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Pearl 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, 2017       $54,400       $54,400
December 31, 2018       48,000       46,600
December 31, 2019       33,900       35,700

(a) Prepare the journal entry at December 31 (Pearl’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 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, 2017  


Dec. 31, 2018  


Dec. 31, 2019  

(b) At what amount will the note be reported on Pearl’s 2018 balance sheet?

Note to be reported on Pearl’s 2018 balance sheet
$

(c) What is the effect of recording the fair value option on these notes on Pearl’s 2019 income?

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

Homework Answers

Answer #1

(a) Solution :-

Date Particulars Debit Credit
December 31, 2017 No entry is required because in the year 2017 both carrying Value and fair value remains the same $0

$0

December 31, 2018 Notes Payable $1400
Loss - Income $1400
December 31, 2019 Unrealized holdings gain or loss (Refer to Note 1) $3200
Notes Payable (Refer to Note 1) $3200

Notes 1:-

Year ending Carrying value Fair Value Unrealized holding gains or loss Change in unrealized holdings gain or loss
2017 54400 54400 0 0
2018 48000 46600 1400 1400
2019 33900 35700 (1800) (3200)

(b) Answer :- Note to be reported on pearls 2018 balance sheet is $46600

(c) Answer :- The main effect of recording fair value options on these notes would result in unrealized holdings loss of $3200. Kindly refer to note 1 for clarity.

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