INTERMEDIATE ACCOUNTING-ACCESS >CUSTOM<
9th Edition
ISBN: 9781260699555
Author: SPICELAND
Publisher: MCG CUSTOM
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Textbook Question
Chapter A, Problem 3E
Derivatives; interest rate swap; fixed rate investment
(This is a variation of E A–2, modified to consider an investment in debt securities.)
On January 1, 2018, S&S Corporation invested in LLB Industries’ negotiable two-year, 10% notes, with interest receivable quarterly. The company classified the investment as available-for-sale. S&S entered into a two-year interest rate swap agreement on January 1, 2018, 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 investment to increase. The agreement called for the company to make payment based on a 10% fixed interest rate on a notional amount of $200,000 and to receive 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, 2018. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the investment in notes are as follows:
Required:
- 1. Calculate the net cash settlement at March 31 and June 30, 2018.
- 2. Prepare the
journal entries through June 30, 2018, to record the investment in notes, interest, and necessary adjustments for changes in fair value.
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Chapter A Solutions
INTERMEDIATE ACCOUNTING-ACCESS >CUSTOM<
Ch. A - Prob. A.1QCh. A - Prob. 2QCh. A - Prob. A.2QCh. A - Prob. 3QCh. A - Prob. A.3QCh. A - Prob. 4QCh. A - Prob. A.4QCh. A - What is the effect on interest of an interest rate...Ch. A - Prob. A.5QCh. A - How are derivatives reported on the balance sheet?...
Ch. A - Prob. A.6QCh. A - When is a gain or a loss from a cash flow hedge...Ch. A - Prob. A.7QCh. A - Prob. 1ECh. A - Prob. A.1ECh. A - Derivatives; interest rate swap; fixed rate debt...Ch. A - Derivatives; interest rate swap; fixed rate...Ch. A - Derivatives; interest rate swap; fixed rate debt;...Ch. A - Prob. 5ECh. A - Derivatives; interest rate swap; fixed-rate debt;...Ch. A - Derivatives; interest rate swap On January 1,...Ch. A - Derivatives; interest rate swap; comprehensive...Ch. A - Derivatives; interest rate swap; fixed rate debt;...Ch. A - Real World Case A1 Derivative losses; recognition...Ch. A - Research Case A4 Issue related to the derivatives...Ch. A - Prob. A.4BYP
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