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Chapter 14: Q13BE (page 754)

BE14-14 (L04) Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. The note wasissued at an effective rate of 11% and has a carrying value of 16,000.Atyear−end,ShonenKnife′sborrowingrate(creditrisk)hasdeclined;thefairvalueofthenotepayableisnow17,500. (a) Determine the unrealized holding gain or loss on the note.(b) Prepare the entry to record any unrealized holding gain or loss.

Short Answer

Expert verified

The unrealized holding loss on the note is $1,500

Step by step solution

01

Meaning of Accounting Entry

The accounting entry is assumed as the formal document that records the business transactions. The accounting entry can also be called the journal entry. The recording of the journal entries is the first step.

02

(a) Determination of unrealized holding gain or loss

Unrealised holding gain or loss= Fair value− carrying value= $17,500−$16,000=$1,500

The unrealised loss is $1,500

03

Step3:(b) Preparation of adjusting journal entry for unrealizable holding loss

Shonen Knife Corporation

Journal entry

Date

Account and explanation

Debit $

Credit $

Unrealized losses

1500

Notes payable

1500

(To the fair value loss of $1500 on notes payable is recorded)

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Most popular questions from this chapter

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

(Issuance and Redemption of Bonds; Income Statement Presentation) Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of 3,000,000onJanuary2,2003,atadiscountof150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2017, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.

Instructions

(a) Prepare journal entries to record the issuance of the 11% bonds and the redemption of the 9% bonds.

(b) Indicate the income statement treatment of the gain or loss from redemption and the note disclosure required.

On January 2, 2012, Banno Corporation issued \(1,500,000 of 10% bonds at 97 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”)

The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2017, Banno called \)900,000 face amount of the bonds and redeemed them.

Instructions

Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2017 and prepare the journal entry to record the redemption.

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of 300,000.OnApril30,2017,whenthesebondshadanunamortizeddiscountof10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

Strickland Company owes 200,000plus18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2017, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2017, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of 390,000,accumulateddepreciationof221,000, and a fair value of \(180,000.

Instructions

  1. Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
  2. How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2017 income statement?
  3. Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock (\)10 par) which has a fair value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland’s stock as a trading investment, prepare the entries to record the transaction for both parties.
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