Solutions 12–56
of the note payable at the beginning of the year
tractual interest rate of 6% on the face amount of the
carrying value of the note payable for the difference.
12–57 Solutions
12.30 a. continued.
December 31, 2009
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+143
+143
IncSt → RE
To record interest expense for the increase in the
carrying value of the swap contract for the passage of
December 31, 2009
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,000
–1,000
To record cash paid to the counterparty because the
Firm B must revalue the note payable and the swap contract for changes
in fair value. The bank resets the interest rate in the swap agreement to
Present Value of Interest Payments: $3,000 X .96154 = ……… $ 2,885
December 31, 2009
Solutions 12–58
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,888
–1,888
IncSt → RE
To measure the note payable at fair value using an
12–59 Solutions
12.30 a. continued.
The fair value of the swap contract increases. Sandretto Corporation will
receive $1,000 at the end of 2010 because of the swap contract. Thus,
the swap contract becomes an asset instead of a liability. The present
December 31, 2009
Swap Contract (Liability) ……………………………………. 926
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+962
–926
–1,888
IncSt → RE
To measure the swap contract at fair value using a
At the end of 2009, the Note Payable account has a balance of $50,962
and the Swap Contract account has a debit balance of $962.
b. January 1, 2010
Note Payable ……………………………………………………. 50,962
Swap Contract (Asset) …………………………………… 962
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–50,000
–50,962
–962
To repay note payable prior to maturity and close
out the swap contract.
c. The entries would be identical if Sandretto Corporation chose the fair
Solutions 12–60
12–61 Solutions
12.31 (Avery Corporation; accounting for an interest rate swap as a cash flow
hedge.)
January 1, 2008
Equipment …………………………………………………………….. 50,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+50,000
+50,000
To record the acquisition of equipment by giving a $50,000
note payable with a variable interest rate of 6%.
December 31, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,000
–3,000
IncSt → RE
To recognize interest expense and cash payment at the
The fair value of the swap agreement on December 31, 2008 after the
Avery Corporation on December 31 of 2009 and December 31 of 2010 if the
interest rate remains at 8%.
December 31, 2008
Swap Contract ………………………………………………………. 1,783
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,783
+1,783
OCInc →
AOCInc
To measure the swap contract at fair value and recognize
an asset on the balance sheet and a gain in other compre-
hensive income.
Solutions 12–62
12–63 Solutions
12.31 continued.
December 31, 2009
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–4,000
–4,000
IncSt → RE
To recognize interest expense and cash payment at the
Avery Corporation must also recognize interest on the swap contract because
of the passage of time.
December 31, 2009
Swap Contract ………………………………………………………. 143
Interest on Swap Contract ………………………………….. 143
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+143
+143
OCInc →
AOCInc
– .06)] required by the swap contract. The entry is:
December 31, 2009
Cash ……………………………………………………………………. 1,000
Swap Contract ………………………………………………….. 1,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,000
–1,000
To record cash received from the counterparty because
the interest rate increased from 6% to 8%.
Solutions 12–64
12–65 Solutions
12.31 continued.
December 31, 2009
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,000
OCInc →
AOCInc
+1,000
IncSt → RE
To reclassify a portion of other comprehensive income to
net income for the hedged portion of interest expense on
the note payable.
likewise, has a credit balance of $926.
Resetting the interest rate on December 31, 2009 to 4% changes the fair
value of the swap contract from an asset to a liability. The present value of the
swap contract is:
December 31, 2009
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–926
+962
–1,888
OCInc →
AOCInc
To measure the swap contract at fair value and recognize
a liability on the balance sheet and a loss in other com-
prehensive income.
December 31, 2010
Interest Expense ……………………………………………………. 2,000
Cash ……………………………………………………………….. 2,000
Solutions 12–66
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2,000
–2,000
IncSt → RE
12–67 Solutions
12.31 continued.
December 31, 2010
Interest on Swap Contract ………………………………………. 38
Swap Contract ………………………………………………….. 38
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+38
–38
OCInc →
AOCInc
To record interest for the increase in the carrying value
of the swap contract for the passage of time: $38 = .04 X
$962.
December 31, 2010
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,000
–1,000
To record cash paid to the counterparty because the
December 31, 2010
Assets
=
Liabilities
+
Shareholders‘
Equity
(Class.)
–1,000
IncSt → RE
+1,000
OCInc →
AOCInc
To reclassify a portion of other comprehensive income to
net income for the hedged portion of interest expense on
the note payable.
December 31, 2010
Solutions 12–68
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–50,000
–50,000
To record repayment of note payable at maturity.
12–69 Solutions
12.31 continued.