Pearl Company commonly issues long-term notes payable to its various lenders. Pe

Question

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

(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

(b) At what amount will the note 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?

Carrying Value

Fair Value

December 31, 2017 $50,400 $50,400 December 31, 2018 41,500 40,000 December 31, 2019 32,600 34,400

Explanation / Answer

a).

b). Note to be reported on Pearl's 2018 Balance Sheet = $40000

c). The Effect of recording the fair value option would result in unrealized holding :-

= ($34400 - $32600) + $1500

= $1800 + $1500

= $3300

Date Particulars Debit ($) Credit ($) Dec. 31, 2017 No Entry Dec. 31, 2018 Notes Payable A/c Dr. 1500 To Unrealized Holding Gain or Loss 1500 Dec. 31, 2019 Unrealized Holding Gain or Loss A/c Dr. 3300 To Notes Payable (($34400-$32600)+$1500) 3300

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