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 foir 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 volues of the note are as follows: January 1 2021 2021 (5,200) $248, 800 December 31 2022 42.400 4254, 400 2023 Fair value of intereat rate awap Yair value of note payable 4252,000 $252,000 Required: 1. Calculate the net cash settlement at the end of 2021, 2022, and 2023. 2. Prepare the journal entries during 2021 to record the issuance of the note, interest, and necessary adjustments for changes in fair value. 3. Prepare the journal entries during 2022 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value.
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 foir 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 volues of the note are as follows: January 1 2021 2021 (5,200) $248, 800 December 31 2022 42.400 4254, 400 2023 Fair value of intereat rate awap Yair value of note payable 4252,000 $252,000 Required: 1. Calculate the net cash settlement at the end of 2021, 2022, and 2023. 2. Prepare the journal entries during 2021 to record the issuance of the note, interest, and necessary adjustments for changes in fair value. 3. Prepare the journal entries during 2022 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value.
Financial Accounting Intro Concepts Meth/Uses
14th Edition
ISBN:9781285595047
Author:Weil
Publisher:Weil
Chapter13: Marketable Securities And Derivatives
Section: Chapter Questions
Problem 30P
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