Flint Company loans Sarasota Company $1,870,000 at 7% for 3 years on January 1, 2017. Flint...

Flint Company loans Sarasota Company $1,870,000 at 7% for 3 years on January 1, 2017. Flint intends to hold this loan to maturity. The fair value of the loan at the end of each reporting period is as follows.

December 31, 2017 $1,924,000.

December 31, 2018 1,892,000

December 31, 2019 1,870,000

Prepare the journal entry(ies) at December 31, 2017, and December 31, 2019, for Flint 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

Expert Solution

(a) Required journal entries when the fair value option is not used:

Note: Annual interest expense is $130,900 ($1,870,000 x 7%).

(b) Required journal entries when the fair value option is used:

Note: Loss is calculated as the difference between fair value and the par value. Thus, on December 31, 2017, loss due to change in fair value is $54,000 ($1,924,000 - $1,870,000). On December 31, 2019, fair value is equal to the par value, so no adjustment entry is required.

ekkarill92 answered 1 year ago

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