Question

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 11% and has a carrying value of $16,000. At year-end, Shonen Knife's borrowing rate (credit risk) has declined; the fair value of the note payable is now $17,500. (a) Determine the unrealized holding gain or loss' on the note. (b) Prepare the entry to record any unrealized holding gain or loss

Answer 1

The losses on fair value measurement of the notes payable is $1500

The required entries is as below

Dr Unrealized losses(a component of equity) $1500

Cr Notes payable $1500

Being fair value losses on notes payable

Step-by-step explanation:

The losses on fair value recognition of the notes payable of Shonen Knife Corporation is $1500(Fair value -Book Value)

Since fair value is more than book value of the notes payable,there is an unrealized gain recorded in the books with the below entries

Dr Unrealized losses(a component of equity) $1500

Cr Notes payable $1500

Being fair value losses on notes payable

It recorded losses because amount of obligation has potentially increased.