E14-19B (Fair Value Option) Emily Company commonly issues long-term notes payable to its various lenders. Emily has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 7% on an annual basis). Emily has elected to

E14-19B (Fair Value Option) Emily Company commonly issues long-term notes payable to its various lenders. Emily has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 7% on an annual basis). Emily has elected to use the fair value option for the long-term notes issued to Second National Bank and has the following data related to the carrying and fair value for these notes.

                                        Carrying Value               Fair Value

December 31, 2014             $50,000                        $54,000

December 31, 2015               40,000                          42,500

December 31, 2016               61,000                          62,500

Instructions

(a) Prepare the journal entry at December 31 (Emily’s year-end) for 2014, 2015, and 2016, to record the fair value option for these notes.

(b) At what amount will the note be reported on Emily’s 2015 statement of financial position?

(c) What is the effect of recording the fair value option on these notes on Emily’s 2016 income?

(d) Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate that Emily’s creditworthiness has improved or declined in

2016? Explain.