Question

Pierre Company has a 12% note payable with a carrying value of \(20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is \)22,600. Prepare the entry to record the fair value option for this note, assuming

(a) no change in credit risk, and

(b) the change is due to a change in credit risk.

Short answer

Note payable is $2,600.

Step-by-step solution

Meaning of Fair value

Fair value is the amount that two parties, preferably in an active market, are willing to exchange for an asset or liability. In this case, supply and demand will probably impact the value of the asset under consideration.

Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
(a)	Unrealized holding Gain or loss-Income	2,600
	Notes Payable		2,600
(b)	Unrealized holding Gain or loss-Equity	2,600
	Notes Payable		2,600