Wildhorse Company commonly issues long-term notes payable to its various lenders
ID: 2409802 • Letter: W
Question
Wildhorse Company commonly issues long-term notes payable to its various lenders. Wildhorse has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Wildhorse has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes. Any changes in fair value are due to changes in market rates, not credit risk.
Carrying Value
Fair Value
(a) Prepare the journal entry at December 31 (Wildhorse’s year-end) for 2017, 2018, and 2019, to record the fair value option for these notes. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
(b) At what amount will the note be reported on Wildhorse’s 2018 balance sheet?
(c) What is the effect of recording the fair value option on these notes on Wildhorse’s 2019 income?
Carrying Value
Fair Value
December 31, 2017 $57,700 $57,700 December 31, 2018 44,700 43,400 December 31, 2019 36,200 38,300Explanation / Answer
A) Journal entries:
Date
Account titles and explanation
Debit
Credit
Dec 31,2017
Fair Value Adjustment A/C
0
To Unrealised gain on loans payable
0
Dec31,2018
Fair Value Adjustment A/C
1300
To Unrealised gain on notes payable
1300
(Being Gain on fair value measurement has been accounted)
(44,700-43400=1300)
Dec 31,2018
Long term notes payable A/c
1300
To Fair Value Adjustment
1300
(Being the Notes payable reduced to the extent of fair value gain)
Dec 31,2019
Un realised loss on notes payable A/C
2100
To Fair Value Adjustment
2100
(Being loss on fair value measurement has been accounted)
Dec 31,2019
Fair Value Adjustment A/C
2100
To Long term Notes Payable
2100
(Being fair value adjustment made to notes payable)
B) Note Payable on Dec 31,2018:
Note to be reported on Wild horse 2018 balance sheet
$43,400
C) Effect on 2019 Income due to recording at fair value:
The effect of recording the fair value option would result in unrealised holding loss
$2100
Date
Account titles and explanation
Debit
Credit
Dec 31,2017
Fair Value Adjustment A/C
0
To Unrealised gain on loans payable
0
Dec31,2018
Fair Value Adjustment A/C
1300
To Unrealised gain on notes payable
1300
(Being Gain on fair value measurement has been accounted)
(44,700-43400=1300)
Dec 31,2018
Long term notes payable A/c
1300
To Fair Value Adjustment
1300
(Being the Notes payable reduced to the extent of fair value gain)
Dec 31,2019
Un realised loss on notes payable A/C
2100
To Fair Value Adjustment
2100
(Being loss on fair value measurement has been accounted)
Dec 31,2019
Fair Value Adjustment A/C
2100
To Long term Notes Payable
2100
(Being fair value adjustment made to notes payable)
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