Question

Jones Company has notes receivable that have a fair value of $950,000 and a carrying amount of $1,250,000. Jones decides on December 31, 2017, to use the fair value option for these recently-acquired receivables. Which of the following entries will be made on December 31, 2017 to record the unrealized holding gain/loss?
A. Unrealized Holding Gain or Loss -Equity 300,000
Notes Receivable 300,000
B. Unrealized Holding Gain or Loss-Income. 300,000
Notes Receivable 300,000
C. Notes Receivable 300,000 300,000
Unrealized Holding Gain or Loss-Income 300,000
D. Notes Receivable 300,000 300,000
Unrealized Holding Gain or Loss Equity 300,000

Answer 1

Answer:

B) Unrealized Holding Gain or Loss-Income. 300,000

Notes Receivable 300,000

Explanation:

December 31, 2017 realized losses:

• Dr Unrealized Holding Gain or Loss―Income 300,000
• Cr Notes Receivable 300,000

Since the carrying value of the notes receivable was $300,000 higher than their fair market value, it means that the company will lose money.

Since the company is losing money, it should debit the Unrealized Holding Gain or Loss―Income account. Gains are credited and losses are debited.