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Michek Company loans Sarasota Company $2,000,000 at 6% for 3 years on January 1, 2020. Michek 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 $2,050,000 December 31, 2021 2,020,000 December 31, 2022 2,000,000 Prepare the journal entry(ies) at December 31, 2020, and December 31, 2022, for Michek 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.

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anthougo

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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