Exercise A–4
Requirement 1
June 30
Fair value of interest rate swap $11,394
Fair value of note payable $220,000
Exercise A–4 (concluded)
Requirement 2
Your entries would be the same whether there was or was not an additional rise
in the fair value of the note (higher than that of the swap) on June 30 due to
investors’ perceptions that the creditworthiness of LLB was improving. When a
note’s fair value changes by an amount different from that of a designated
hedge instrument for reasons unrelated to interest rates, we ignore those
changes. We recognize only the fair value changes in the hedged item that we
can attribute to the risk being hedged (interest rate risk in this case). The entries
would be:
June 30
Interest expense ([10% x ¼] x $200,000) 5,000
Cash 5,000
To record interest
Exercise A–5
January 1
Cash 200,000
March 31
June 30
Interest expense ([8% x ¼] x $206,472) 4,129
Notes payable (difference) 871
Cash ([10% x ¼] x $200,000) 5,000
Exercise A–6
Requirement 1
June 30
Fair value of interest rate swap $11,394
Fair value of note payable $220,000
Exercise A–6 (concluded)
Requirement 2
Your entries would be the same whether there was or was not an additional rise
in the fair value of the note (higher than that of the swap) on June 30 due to
investors’ perceptions that the creditworthiness of LLB was improving. When a
note’s fair value changes by an amount different from that of a designated
hedge instrument for reasons unrelated to interest rates, we ignore those
changes. We recognize only the fair value changes in the hedged item that we
can attribute to the risk being hedged (interest rate risk in this case). The entries
would be:
June 30
Interest expense ([8% x ¼] x $206,472) 4,129
Problem A–1
Requirement 1
January 1 December 31
2018 2018 2019 2020
Fixed rate 8% 8% 8% 8%
Floating rate 8% 9% 7% 7%
Requirement 2
January 1, 2018
Cash 100,000
December 31, 2018
Interest expense (8% x $100,000) 8,000
Cash 8,000
To record interest
PROBLEMS
Problem A–1 (continued)
Requirement 3
December 31, 2019
Interest expense (8% x $100,000) 8,000
Cash 8,000
To record interest
Problem A–1 (continued)
Requirement 4
December 31, 2020
Interest expense (8% x $100,000) 8,000
Cash 8,000
To record interest