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 0000 Fair Value December 31, 2020 $54,00000 $54,00000 December 31, 2021 44,00000 42,50000 December 31, 2022 36,00000 38,00000 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.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
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 | 0000 | Fair Value | |
|
December 31, 2020
|
$54,00000
|
$54,00000
|
|
|
December 31, 2021
|
44,00000
|
42,50000
|
|
|
December 31, 2022
|
36,00000
|
38,00000
|
Instructions
a. Prepare the
b. At what amount will the note be reported on Fallen's 2021
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.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
