On January 1, 2021, JPS Industries borowed $220,000 from Austin Bank by issuing a three-year, floating rate note based on LIBOR,with interest payable semi-annually on June 30 and December of each year. JPS entered into a three-year interest rate swapagreement on January 1, 2021, and designaled the swap as a cash flow hedge. The intent was to hedge the risk that interest rates willrise, increasing its semi-annual interest payments. The swap agreement called for the company to receive payment based on a floatingInterest rate on a notional amount of $220,000 and to pay a 4.0% fixed Interest rate. The contract called for cash settlement of the netinterest amount semi-annually, and the rate on each reset date (June 30 and December 31) determines the variable interest rate for thefollowing six months.LIBOR rates in 2021 were 4.0% at January 1, 3.0% at June 30, and 5.5% at December 31. The fair values of the swap on those dates,obtalned by dealer quotes, were as follows:January 1June 30 December 31Swap fair value$(2,300) $ 3,600Required:1. Calculate the net settlement on June 30, 2021.2. Prepare journal entries for the period January 1 to December 31, 2021, to record the note payable and hedging instrument,necessary adjustments for changes in fair value, and settlement of the swap contract.

Requirement 1 June 30 Receive floating interest ($220,000×3%×½) = $3,300 Pay fixed interest…

On January 1, 2021, JPS Industries borrowed $220,000 from Austin Bank by issuing with interest payable semi-annually on June 30 and December of each year. JPS er agreement on January 1, 2021, and designated the swap as a cash flow hedge. The rise, increasing its semi-annual interest payments. The swap agreement called for t Interest rate on a notional amount of $220,000 and to pay a 4.0% fixed Interest rate interest amount semi-annually, and the rate on each reset date (June 30 and Decer following six months. LIBOR rates in 2021 were 4.0% at January 1, 3.0% at June 30, and 5.5% at Decembe obtalned by dealer quotes, were as follows: June 30 December 3: $(2,300) $ 3,680 January 1 Swap fair value Required:

On January 1, 2021, JPS Industries borrowed $220,000 from Austin Bank by issuing with interest payable semi-annually on June 30 and December of each year. JPS er agreement on January 1, 2021, and designated the swap as a cash flow hedge. The rise, increasing its semi-annual interest payments. The swap agreement called for t Interest rate on a notional amount of $220,000 and to pay a 4.0% fixed Interest rate interest amount semi-annually, and the rate on each reset date (June 30 and Decer following six months. LIBOR rates in 2021 were 4.0% at January 1, 3.0% at June 30, and 5.5% at Decembe obtalned by dealer quotes, were as follows: June 30 December 3: $(2,300) $ 3,680 January 1 Swap fair value Required:

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter13: Marketable Securities And Derivatives

Section: Chapter Questions

Problem 30P

See similar textbooks

Similar questions

On January 1, 2024, Avalanche Corporation borrowed $124,000 from First Bank by issuing a two-year, 8% fixed-rate note with annual interest payments. The principal of the note is due on December 31, 2025. Avalanche wanted to hedge against declines in general interest rates, so it also entered into a two-year SOFR-based interest rate swap agreement on January 1, 2024, and designates it as a fair value hedge. Because the swap is entered at market rates, the fair value of the swap is zero at inception. The agreement called for the company to receive fixed interest at the current SOFR swap rate of 5% and pay floating interest tied to SOFR. This arrangement results in an effective variable rate on the note of SOFR + 3%. The contract specifies that the floating rate resets each year on June 30 and December 31 for the net settlement that is due the following period. In other words, the net cash settlement is calculated using beginning- of-period rates. The SOFR rates on the swap reset dates…
On January 1, 2021, Labtech Circuits borrowed $216,000 from First Bank by issuing a three-year, 9% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 9% fixed interest rate on a notional amount of $216,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 9% at inception and 10%, 8%, and 8% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as follows: January 1 December 31 2021 2021 2022 2023…
On January 1, 2021, Labtech Circuits borrowed $216,000 from First Bank by issuing a three-year, 9% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 9% fixed interest rate on a notional amount of $216,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for ash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 9% at inception and 10%, 8%, and 8% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes contained from a derivatives dealer. Those quotes and the fair values of the note are as follows:…
On January 1, 2021, Labtech Circuits borrowed $110,000 from First Bank by issuing a three-year, 9% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 9% fixed interest rate on a notional amount of $110,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 9% at inception and 10%, 8%, and 8% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows: January 1 December 31 2021 2021 2022…
On January 1, 2021, Labtech Circuits borrowed $252,000 from First Bank by issuing a three-year, 6% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 6% fixed interest rate on a notional amount of $252,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year.Floating (LIBOR) settlement rates were 6% at inception and 7%, 5%, and 5% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as follows: January 1 December 31 2021 2021 2022 2023…
On January 1, 2021, Labtech Circuits borrowed $160,000 from First Bank by issuing a three-year, 9% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as fair value hedge. The agreement called for the company to receive payment, based on an 9% fixed interest rate on a notional amount of $160,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract cash settlement of the new interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 9% at inception and 10%, 8%, and 8% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows:…
On January 1, 2021, LLB Industries borrowed $360,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. The agreement called for the company to receive payment based on a 10% fixed interest rate on a notional amount of $360,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly. Floating (LIBOR) settlement rates were 10% at January 1, 8% at March 31, and 6% June 30, 2021. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below. January 1…
On January 1, 2023, Fontaine Corporation issued an $800,000 notes payable to Allegheny StateBank. The note pays coupon payments at the rate of 5%, which is also the market rate of interestwhen the note was issued. The note matures in three years. Fontaine Corporation entered into aninterest rate swap with the same maturity and notional amount to hedge against falling interestrates. The swap will result in Fontaine Corporation paying floating rate interest tied to theprevailing LIBOR rate and receiving fixed rate interest at 5%. Interest payments and cashsettlement occur at the end of each year. LIBOR settlement rates at the end of 2023, 2024, and2025 are 6%, 7%, and 6%, respectively.a) Prepare the required journal entries for Fontaine Corporation using the shortcut methodfor 2023-2025.b) Indicate how the above entries affect Fontaine Corporation’s reported net earnings foreach year.
! Required information On January 1, 2024, Avalanche Corporation borrowed $102, 000 from First Bank by issuing a two-year, 8% fixed-rate note with annual interest payments. The principal of the note is due on December 31, 2025. Avalanche wanted to hedge against declines in general interest rates, so it also entered into a two-year SOFR-based interest rate swap agreement on January 1, 2024, and designates it as a fair value hedge. Because the swap is entered at market rates, the fair value of the swap is zero at inception. The agreement called for the company to receive fixed interest at the current SOFR swap rate of 5% and pay floating interest tied to SOFR. This arrangement results in an effective variable rate on the note of SOFR +3%. The contract specifies that the floating rate resets each year on June 30 and December 31 for the net settlement that is due the following period. In other words, the net cash settlement is calculated using beginning of period rates. The SOFR rates on…
On January 1, 2020, ABC Co. borrowed P5,000,000 from a bank at a variable rate of interest for 4 years. Interest will be paid annually to the bank on December 31, and the principal is due on December 31, 2023. Under the agreement, the market rate of interest on each January 1 resets the variable rate for that period and the amount of interest to be paid on December 31. To protect itself from fluctuations in interest rate, the entity hedged the variable interest by entering into a four-year “receive variable, pay fixed” interest rate swap with a speculator. The interest rate swap s based on the notional amount of P5,000,000 and an 8% fixed interest rate. This agreement means that the entity will receive a swap payment from the speculator if the market rate on January 1 is more than 8% and will make a swap payment to the speculator if the market rate on January 1 is lower than 8%. The swap payments are made at the end of each year. The entity has designated this interest rate swap as…
On January 1, 2020, Sheridan Technical Inc. issues a 5-year, 6% fixed-rate interest only, nonprepayable $5,100,000 note with interest payable on June 30 and December 31 of each year. Sheridan decides to change the interest rate from a fixed rate to variable rate and enters into a swap agreement with Last Bank Financial. The swap agreement specifies that Sheridan will receive a fixed rate at 6% and pay variable with settlement dates that match the interest payments on the debt. Assume that interest rates have increased during 2020 and that Sheridan paid $34,900 as an adjustment to interest expense for the settlement at June 30, 2020. The gain related to the debt (due to interest rate changes) was $111,000. The value of the obligation under the swap contract increased $111,000. (a) Prepare the journal entry to record the payment of interest expense on June 30, 2020. (b) Prepare the journal entry to record the receipt of the swap settlement on June 30, 2020. (c) Prepare the…
On July 1, 2016, Hargrove Corporation issued a 2-year note with a face value of $4,000,000 and a fixed interest rate of 9%, payable on a semiannual basis. On January 15, 2017, the company entered into an interest rate swap with a financial institution in anticipation of lower variable rates. At the initial date of the swap, the company paid a premium of $9,200. The swap had a notional amount of $4,000,000 and called for the payment of a variable rate of interest in exchange for a 9% fixed rate. The variable rates are reset semiannually beginning with January 1, 2017, in order to determine the next interest payment. Differences between rates on the swap will be settled on a semiannual basis. Variable interest rates and the value of the swap on selected dates are as follows:Reset Date Variable Interest Rate Value of the SwapJanuary 1, 2017 . . . . . . . . . . . . . 8.75%June 30, 2017. . . . . . . . . .. . . . . 8.50% $14,000December…