Harper Company commonly issues long-term notes payable to its various lenders. Harper has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Harper 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.

Carrying Value Fair Value

December 31, 2017 $135,000 $135,000

December 31, 2018 112,000 107,000

December 31, 2019 90,000 97,000

Instructions

(a) Prepare the journal entry at December 31 (Harpers 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 Harpers 2018 balance sheet?

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