Question

Vaughn Company loans Sarasota Company $1,950,000 at 6% for 3 years on January 1, 2020. Vaughn intends to hold this loan to maturity and has the financial ability to do so. The fair value of the loan at the end of each reporting period is as follows. December 31, 2020 $2,000,000 December 31, 2021 1,972,000 December 31, 2022 1,950,000 Prepare the journal entry(ies) at December 31, 2020, and December 31, 2022, for Vaughn related to these bonds, assuming (a) it does not use the fair value option, and (b) it uses the fair value option. Interest is paid on January 1. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Answer:

JOURNAL ENTRIES

a) 31 Dec 2020

Debit Interest receivable $ 117,000 Credit Interest income $117,000

31 Dec 2022

Debit Interest is receivable $117,000 Credit Interest Income $117,000

Debit Bank $1,950,000 Credit Bond investment $1,950,000

b) 31 Dec 2020

Debit Interest receivable $ 117,000 Credit Interest income $117,000

31 Dec 2022

Debit Interest is receivable $118,320 Credit Credit Interest Income$118,320

Debit fair value loss on bond $ 22,000 Credit Bond investment $22,000

Debit Bank $1,950,000 Credit Bond investment $1,950,000

Explanation:

interest =  loan * % = $1,950,000 * 6% = $117,000

using fair value

interest = loan (fair value) * %

interest is calculated for at the amount of loan beginning that current year is calculated for the months the loan is existence for in that particular year.

Because of fair value changes in the loan, we must recognize the changes in profit and loss section either in incomes if it is a gain or in expenses if it is a loss