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.

$$

$$

Carrying Value

$$

Fair Value

December $31,2025$

$$

$$54,000$

$$

$$54,000$

December $31,2026$

$$

$44,000$

$$

$42,500$

December $31,2027$

$$

$36,000$

$$

$38,000$

Instructions

Prepare the journal entry at December $31($Fallen$$s year$-$end$)$ for $2025,2026,$ and $2027,$ to record the fair value option for these notes.

At what amount will the note be reported on Fallen$$s $2026$ balance sheet?

What is the effect of recording the fair value option on these notes on Fallen$$s $2027$ net income?

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 $2027?$ Explain.