Wildhorse Company commonly issues long-term notes payable to its various lenders

Question

Wildhorse Company commonly issues long-term notes payable to its various lenders. Wildhorse has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Wildhorse 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

(a) Prepare the journal entry at December 31 (Wildhorse’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

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

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

Carrying Value

Fair Value

December 31, 2017 $57,700 $57,700 December 31, 2018 44,700 43,400 December 31, 2019 36,200 38,300

Explanation / Answer

Solution: a. Date Account Titles and Explanation Debit Credit Dec. 31, 2017 No Entry 0 No Entry 0 Notes: Carrying value = Fair value = 57,700, no adjustment needed. Dec. 31, 2018 Notes Payable 1300 Unrealized Holding Gain or loss -Income 1300 Notes: Carrying value > Fair value by 1,300, so notes payable reduced by 1300 to reflect at fair value Dec. 31, 2019 Unrealized Holding Gain or loss -Income 2,100 Notes Payable 2,100 Notes: Carrying value

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