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.

Short answer

(a) Unrealized holding gain is $1,500.

(b) The total for both debit and credit sides is $1,500.

Step-by-step solution

Meaning of Unrealized Gain

Unrealized gainis a gain that the investor does not actually receive. It accrues because of apositive change in assets’ value. It leads to an increase in the book value of assets.

Part (a) Calculation of unrealized holding gain or loss on the note

Particular	Amount
Fair-Value of note Payable at Year-end	$17,500
Less: Carrying Value	$(16,000)
Unrealized holding Gain	$1,500

Part (b) Journal Entry

Date	Accounts and Explanation	Debit	Credit
	Unrealized Holding Gain	$1,500
	Bonds Payable		$1,500