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. Any changes in fair value are due to changes in market rates, not credit risk.

Instructions

a. Prepare the journal entry at December 31 (Fallen?s year-end) for 2020, 2021, and 2022, to record the fair value option for these notes.

b. At what amount will the note be reported on Fallen?s 2021 balance sheet?

c. What is the effect of recording the fair value option on these notes on Fallen?s 2022 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 2022? Explain.

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Fair Value Carrying Value December 31, 2020 December 31, 2021 December 31, 2022 $54,000 $54,000 44,000 42,500 38,000 36,000