(Fair Value Hedge Interest Rate Swap) On December 31, 2017, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8% andwill pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2017, is 7%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows. Date 6-Month LIBOR Rate Swap Fair Value Debt Fair Value December 31, 2017 7.0% — $10,000,000 June 30, 2018 7.5% (200,000) 9,800,000 December 31, 2018 6.0% 60,000 10,060,000 Instructions(a) Present the journal entries to record the following transactions.(1) The entry, if any, to record the swap on December 31, 2017.(2) The entry to record the semiannual debt interest payment on June 30, 2018.(3) The entry to record the settlement of the semiannual swap amount receivables at 8%, less amount payable at LIBOR, 7%.(4) The entry to record the change in the fair value of the debt on June 30, 2018.(5) The entry to record the change in the fair value of the swap at June 30, 2018.(b) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2017.(c) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on June 30, 2018.(d) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2018.
(Fair Value Hedge Interest Rate Swap) On December 31, 2017, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8% and
will pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2017, is 7%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.
Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows.
| Date | 6-Month LIBOR Rate | Swap Fair Value | Debt Fair Value |
| December 31, 2017 | 7.0% | — | $10,000,000 |
| June 30, 2018 | 7.5% | (200,000) | 9,800,000 |
| December 31, 2018 | 6.0% | 60,000 | 10,060,000 |
Instructions
(a) Present the
(1) The entry, if any, to record the swap on December 31, 2017.
(2) The entry to record the semiannual debt interest payment on June 30, 2018.
(3) The entry to record the settlement of the semiannual swap amount receivables at 8%, less amount payable at LIBOR, 7%.
(4) The entry to record the change in the fair value of the debt on June 30, 2018.
(5) The entry to record the change in the fair value of the swap at June 30, 2018.
(b) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2017.
(c) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on June 30, 2018.
(d) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2018.
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