Shamrock

Company commonly issues long
-
term notes payable to its various lenders.

Shamrock

has had a pretty good credit rating such that its effective borrowing rate is quite low
(
less than

Question

Shamrock
 
Company commonly issues long
-
term notes payable to its various lenders.
 
Shamrock
 
has had a pretty good credit rating such that its effective borrowing rate is quite low 
(
less than 
8
%
 ﻿on an annual basis
)
.
 
Shamrock
 
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
December 
3
1
,
 
2
0
2
0
$
5
5
,
8
0
0
$
5
5
,
8
0
0
December 
3
1
,
 
2
0
2
1
4
6
,
5
0
0
4
4
,
9
0
0
December 
3
1
,
 
2
0
2
2
3
7
,
4
0
0
3
9
,
5
0
0
(
a
)
 
Prepare the journal entry at December 
3
1
 
(
Shamrock
’
s year
-
end
)
 ﻿for 
2
0
2
0
,
 
2
0
2
1
,
 ﻿and 
2
0
2
2
,
 ﻿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
Dec. 
3
1
,
 
2
0
2
0
Dec. 
3
1
,
 
2
0
2
1
Dec. 
3
1
,
 
2
0
2
2
(
b
)
 
At what amount

VIPSolutions · Accepted Answer

# Shamrock: Fair Value Option on Long-Term Notes Payable

This solution addresses the journal entries and accounting implications of electing the fair value option for Shamrock’s long-term notes payable.

---

## (a) Journal Entries at Year-End

### 1. Understanding Fair Value Option

- Under the fair value option (ASC 825), changes in fair value are recognized in net income.
- Adjust the carrying value to fair value at each reporting date.
- Any difference is recorded as an unrealized holding gain or loss.

### 2. Data Table

| Date           | Carrying Value | Fair Value |
|----------------|---------------|------------|
| Dec 31, 202   | $55,800       | $55,800    |
| Dec 31, 2021   | $46,500       | $44,900    |
| Dec 31, 2022   | $37,400       | $39,500    |

#### Calculate Change in Fair Value

- **202**: $55,800 (CV) to $55,800 (FV) → No change
- **2021**: $46,500 (CV) to $44,900 (FV) → $1,600 decrease
- **2022**: $37,400 (CV) to $39,500 (FV) → $2,100 increase

### 3. Journal Entries

#### Dec 31, 202

- **No change in fair value**  
  (No Entry)

#### Dec 31, 2021

- **Fair value decreased by $1,600** (unrealized gain)
    - Reduce Notes Payable to fair value
    - Record gain in income

| Date            | Account Titles & Explanation                  | Debit     | Credit    |
|-----------------|----------------------------------------------|-----------|-----------|
| Dec 31, 202    | No Entry                                     |          |          |
| Dec 31, 2021    | Notes Payable                                | $1,600    |           |
|                 | Unrealized Holding Gain—Income                |           | $1,600    |
| Dec 31, 2022    | Unrealized Holding Loss—Income                | $2,100    |           |
|                 | Notes Payable                                |           | $2,100    |

**Explanation:**  
- 2021: Reduce liability, recognize gain (FV < CV)
- 2022: Increase liability, recognize loss (FV > CV)

---

## (b) Reporting Amount on 2021 Balance Sheet

- The note is reported at **fair value**.

**Amount:**  
> $44,900

---

## (c) Effect on 2022 Income

- In 2022, fair value increased from $37,400 to $39,500.
- This results in an **unrealized holding loss**.

**Calculation:**  
$39,500 - $37,400 = **$2,100** loss

**Effect:**  
> The fair value option results in an unrealized holding loss of **$2,100** reported in 2022 income.

---

## (d) Journal Entry for Credit Risk Change (2029 Example)

**Assumption:**  
- Fair value change is now due to a drop in credit rating (from AAA to A).
- Under US GAAP, only fair value changes due to market interest rates are recognized in income.  
- **Credit risk changes are recorded in OCI** (Other Comprehensive Income), not net income.

**Suppose:**  
- Carrying Value: $30,000  
- Fair Value (after credit downgrade): $28,500  
- Decrease of $1,500 due to credit risk.

**Journal Entry (Dec 31, 2029):**

| Date           | Account Titles & Explanation                  | Debit     | Credit    |
|----------------|----------------------------------------------|-----------|-----------|
| Dec 31, 2029   | Notes Payable                                | $1,500    |           |
|                | Unrealized Holding Gain—OCI                  |           | $1,500    |

---

## **Summary Table**

| Date         | Entry/Account            | Debit     | Credit    |
|--------------|--------------------------|-----------|-----------|
| Dec 31, 202 | No Entry                 |          |          |
| Dec 31, 2021 | Notes Payable            | $1,600    |           |
|              | Unrealized Gain—Income   |           | $1,600    |
| Dec 31, 2022 | Unrealized Loss—Income   | $2,100    |           |
|              | Notes Payable            |           | $2,100    |
| Dec 31, 2029 | Notes Payable            | $1,500    |           |
|              | Unrealized Gain—OCI      |           | $1,500    |

---

## **Key Points**

- **Fair Value Option:** Report notes at fair value, recognize changes in income unless due to credit risk.
- **2021 Balance Sheet Value:** $44,900 (fair value).
- **2022 Income Effect:** $2,100 unrealized holding loss.
- **Credit Risk Changes (2029):** Recognized in OCI, not net income.

---

**Image Example:**  
*No images are provided in this solution. If needed, a table or chart can be created to illustrate fair value changes over time.*

---

**If further detail is needed on any step or a specific year, please specify.**

✨ VIPSolutions

Question:

Final Answer:

📢 Instructions:

Study Help, Fast Answers

✨ VIPSolutions

Question:

Final Answer:

📢 Instructions:

Related Answers

Study Help, Fast Answers