- Exercise A 2 Algo Derivatives Interest Rate Swap Fixed Rate Debt Loa 2 On January 1 2021 Llb Industries Borrowed 1 (50.31 KiB) Viewed 51 times
Exercise A-2 (Algo) Derivatives; interest rate swap; fixed rate debt [LOA-2] On January 1, 2021, LLB Industries borrowed $270,000 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 $270,000 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. Fair value of interest rate swap January 1 0 March 31 $ 7,172 $ 277,172 June 30 $ 12,794 $ 282,794 Fair value of note payable $ 270,000 Required: 1. Calculate the net cash settlement at March 31 and June 30, 2021. 2. Prepare the journal entries through June 30, 2021, to record the issuance of the note, interest, and necessary adjustments for changes in fair value.
Required: 1. Calculate the net cash settlement at March 31 and June 30, 2021. 2. Prepare the journal entries through June 30, 2021, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. Complete this
question by entering your answers in the tabs below. Required 1 Required 2 Calculate the net cash settlement at March 31 and June 30, 2021. March 31 June 30 Net cash settlement < Required 1 Required 2 >
Required 1 Required 2 Prepare the journal entries through June 30, 2021, 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.) Ⓒ View transaction list View journal entry worksheet No Date General Journal Debit Credit 1 January 01 Cash Notes payable 2 March 31 Interest expense Cash 3 March 31 Cash Interest expense 4 March 31 Interest rate swap Interest expense 5 March 31 Interest expense Notes payable 6 June 30 Interest expense X N 270,000 270,000