E14-19 (L04) (Fair Value Option) 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 Barclays 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 31, 2017 $54,000 $54,000 December 31, 2018 44,000 42,500 December 31, 2019 36,000 38,000

Instructions (a) Prepare the journal entry at December 31 (Fallens year-end) for 2017, 2018, and 2019, to record the fair value option for these notes. (b) At what amount will the note be reported on Fallens 2018 balance sheet? (c) What is the effect of recording the fair value option on these notes on Fallens 2019 income? (d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Fallens creditworthiness has improved or declined in 2019? Explain.