Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen 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. (Assume that changes in fair value are due to general market interest rate changes).

Instructions

(a) Prepare the journal entry at December 31 (Fallen’s year-end) for 2015, 2016, and 2017, to record the fair value option for these notes.

(b) At what amount will the note be reported on Fallen’s 2016 statement of financial position?

(c) What is the effect of recording the fair value option on these notes on Fallen’s 2017 income?

(d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallen’s creditworthiness has improved or declined in 2017? Explain.

(e) Assuming the conditions that exist in (d), what is the effect of recording the fair value option on these notes in Fallen’s income statement in 2015, 2016, and 2017?

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Carrying Value Fair Value December 31, 2015 54,000 54,000 December 31, 2016 44,000 42,500 December 31, 2017 36,000 38,000