Question

Headland Company loans Sarasota Company $2,190,000 at 6% for 3 years on January 1, 2020. Headland 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 $2,238,000 December 31, 2021 2,210,000 December 31, 2022 2,190,000 Prepare the journal entry(ies) at December 31, 2020, and December 31, 2022, for Headland 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.

Answer 1

Answer:

A. December 31, 2020

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

December 31, 2022

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

B. December 31, 2020

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

Dr Debt Investment $48,000

Cr Unrealized Holding Gain or Loss-Income ($48,000)

December 31, 2022

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

Dr Unrealized Holding Gain or Loss-Income $20,000

Cr Debt Investments ($20,000)

Explanation:

A. Preparation of the journal entry(ies) at December 31, 2020, and December 31, 2022 assuming it does not use the fair value option,

December 31, 2020

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

($2,190,000*6%)

December 31, 2022

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

B. Preparation of the journal entry(ies) at December 31, 2020, and December 31, 2022 assuming it uses the fair value option. Interest is paid on January 1

December 31, 2020

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

Dr Debt Investment $48,000

Cr Unrealized Holding Gain or Loss-Income ($48,000)

($2,238,000-2,190,000)

December 31, 2022

Dr Interest Receivable $131,400

Cr Interest Revenue ($131,400)

Dr Unrealized Holding Gain or Loss-Income $20,000

Cr Debt Investments ($20,000)

(2,210,000-2,190,000)