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% om 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. 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

(a) prepare the JE at December 31 (Fallen's 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 Fallen's 2018 balance sheet?

(c) What is the effect of recording the fair value option on these notes on Fallen's 2019 income?

(d) Assuming the general market interest rates haven been stable over the period, does the fair value data for the notes indicate the Fallen's creditworthiness has improved or declined in 2019? Explain