Problem 17-15 On December 31, 2017, windsor Corp. had a $12,000,000, 8.0% fixed-

Question

Problem 17-15 On December 31, 2017, windsor Corp. had a $12,000,000, 8.0% 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 Windsor will receive interest at a fixed rate of 8.0% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $12,000,000 amount. The LIBOR rate orn December 31, 2017, is 7.0%. 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. Windsor 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 December 31, 2017 June 30, 2018 December 31, 2018 7.0 % 7.5 % 6.0 % Debt Fair Value $12,000,000 11,782,900 12,059,620 (217,100) 59,620

Explanation / Answer

Part 1

Balance sheet

Income statement

Part B

Balance sheet

Income statement

(12000000*8%*1/2)-(12000000*(8%-7%)*1/2) = 480000-60000 = 420000

Part 3

Balance sheet

Income statement

First six months = 420000

Second six months = 480000-(12000000*(8%-7.50%)*1/2))=480000-30000 =450000

Total interest expense = 87000

Liabilities Notes 12,000,000

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