Question

Jones Company has notes receivable that have a fair value of $950,000 and a carrying amount of $1,250,000. Jones decides on December 31, 2020, to use the fair value option for these recently-acquired receivables. Which of the following entries will be made on December 31, 2020 to record the unrealized holding gain/loss?

a. Unrealized Holding Gain or Loss¾Equity......... 300,000
Notes Receivable........................................ 300,000
b. Unrealized Holding Gain or Loss¾Income....... 300,000
Notes Receivable........................................ 300,000
c. Notes Receivable............................................... 300,000
Unrealized Holding Gain or Loss¾Income 300,000
d. Notes Receivable............................................... 300,000
Unrealized Holding Gain or Loss¾Equity

Answer 1

The correct journal entry to record the unrealized holding loss when Jones Company elects the fair value option for its notes receivable is to debit Unrealized Holding Gain or Loss—Income for $300,000 and credit Notes Receivable for $300,000.

The correct answer is option b. Unrealized Holding Gain or Loss—Income....... 300,000
Notes Receivable........................................ 300,000

Step-by-step explanation:

The student is asking about the correct journal entry needed to record an unrealized holding gain or loss on notes receivable when Jones Company has decided to use the fair value option. Since the fair value option records the unrealized gains or losses in the income statement and not in equity, the correct entry on December 31, 2020, for recording the change in value of Jones Company's notes receivable is:

b. Unrealized Holding Gain or Loss—Income....... 300,000
Notes Receivable........................................ 300,000

This entry recognizes the decrease in fair value of the notes receivable, which is $300,000 less than their carrying amount ($1,250,000 - $950,000). The decrease in value is reported as an unrealized loss, which will reduce net income and be reflected in the income statement for the period ending December 31, 2020.