Michek Company's Journal Entries related to loans to Sarasota Company are as follows:
a) Journal Entries without using fair value option:
December 31, 2020:
Debit Interest Receivable $120,000
Credit Interest Revenue $120,000
- To record the 6% interest due on January 1.
December 31, 2022:
Debit Interest Receivable $120,000
Credit Interest Revenue $120,000
- To record the 6% interest due on January 1.
b) Journal Entries with fair value option
December 31, 2020:
Debit Loan Receivable $50,000
Credit Unrealized Gain from Fair Value $50,000
- To record the fair value of the loan.
Debit Interest Receivable $120,000
Credit Interest Revenue $120,000
- To record the 6% interest due on January 1.
December 31, 2022:
Debit Unrealized Loss from Fair Value $20,000
Credit Loan Receivable $20,000
- To record the fair value of the loan.
Debit Interest Receivable $120,000
Credit Interest Revenue $120,000
- To record the 6% interest due on January 1.
Data and Calculations:
January 1, 2020, amount of loan = $2,000,000
Interest rate = 6%
Period of loan = 3 years
December 31, 2020 2021 2022
Fair value of loan $2,050,000 2,020,000 2,000,000
Interest income $120,000 $120,000 $120,000 ($2,000,000 x 6%)
Payment of interest = January 1
December 31, 2021:
Debit Unrealized Loss from Fair Value $30,000
Credit Loan Receivable $30,000
Debit Interest Receivable $120,000
Credit Interest Revenue $120,000
Thus, the Loan Receivable account's balance at December 31 each year varies only when using the fair value option.
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