On January 1, 2016, LLB Industries borrowed $290,000 from Trust Bank by issuing
ID: 2720647 • Letter: O
Question
On January 1, 2016, LLB Industries borrowed $290,000 from Trust Bank by issuing a two-year, 8% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2016, 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 8% fixed interest rate on a notional amount of $290,000 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 8% at January 1, 6% at March 31, and 4% June 30, 2016. 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 March 31 June 30
Fair value of interest rate swap 0 $ 7,372 $ 13,194
Fair value of note payable $ 290,000 $ 297,372 $ 303,194
Required:
1. Calculate the net cash settlement at March 31 and June 30, 2016.
2. Prepare the journal entries through June 30, 2016, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Explanation / Answer
Answer:1
Answer:2
January 1
Cash A/C Dr. $290,000
To Notes payable A/C $290,000
(To record the issuance of the note )
1-Jan 31-Mar 30-Jun Fair value of interest rate Swap 0 7372 13194 Fair value of note payable 290000 297372 303194 Fixed rate 8% 8% 8% Floating rate 8% 6% 4% Fixed interest receipts 5800 5800 Floating Payments 4350 2900 Net cash settlements 1450 2900