Question

Question: Michek Company loans Sarasota Company \(2,000,000 at 6% for 3 years on January 1, 2017. Michek intends to hold this loan to maturity. The fair value of the loan at the end of each reporting period is as follows.

December 31, 2017 \)2,050,000

December 31, 2018 2,020,000

December 31, 2019 2,000,000

Prepare the journal entry(ies) at December 31, 2017, and December 31, 2019, for Michek related to these bonds, assuming (a) itdoes not use the fair value option, and (b) it uses the fair value option. Interest is paid on January 1.

Short answer

Unrealized holding income on December 31, 2017, is $50,000

Step-by-step solution

Definition of Loan

When a lender lends money to a borrower, this is known as a loan.

When Fair Value Option is not chosen

Date	Description	Debit	Credit
December 31, 2017	Loan	$50,000
	Unrealized Holding Income		$50,000
	Being year-end adjustment entry of fair value.

On December 31, 2019, the value of the loan was $2,000,000, which is the same as on January 1, 2017. Hence, there is no unrealized gain or loss, so no entry will pass in this situation.

When the Fair value option is chosen

Date	Description	Debit	Credit
December 31, 2017	Fair Value Adjustment	$50,000
	Unrealized Holding Income		$50,000
	Being year-end adjustment entry of fair value.

On December 31, 2019, the value of the loan was $2,000,000, which is the same as on January 1, 2017. Hence, there is no unrealized gain or loss, so no entry will pass in this situation.