(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 Barclay’s Bank and has the following data related to the carrying and fair value for these notes.
|
Carrying Value |
Fair Value |
|
|
December 31, 2012 |
$54,000 |
$54,000 |
|
December 31, 2013 |
44,000 |
42,500 |
|
December 31, 2014 |
36,000 |
38,000 |
Instructions
(a) Prepare the journal entry at December 31 (Fallen’s year end) for 2012, 2013, and 2014, to record the fair value option for these notes.
(b) At what amount will the note be reported on Fallen’s 2013 balance sheet?
(c) What is the effect of recording the fair value option on these notes on Fallen’s 2014 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 2014? Explain.