Problem 1
On January 1, 2016, 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, 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 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, 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
|
|
$
|
7,172
|
|
$
|
12,794
|
|
|
Fair value of note payable
|
$
|
270,000
|
|
$
|
277,172
|
|
$
|
282,794
|
|
|
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
Problem 2
On January 1, 2016, S&S Corporation invested in LLB Industries' negotiable two-year, 12% notes, with interest receivable quarterly. The company classified the investment as available-for-sale. S&S 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 investment to increase. The agreement called for the company to make payment based on a 12% fixed interest rate on a notional amount of $330,000 and to receive interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly.
Floating (LIBOR) settlement rates were 12% at January 1, 10% at March 31, and 8% June 30, 2016. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the investment in notes are as follows:
|
|
January 1
|
March 31
|
June 30
|
|
Fair value of interest rate swap
|
|
0
|
|
$
|
7,772
|
|
$
|
13,994
|
|
|
Fair value of note payable
|
$
|
330,000
|
|
$
|
337,772
|
|
$
|
343,994
|
|
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 investment in notes, interest, and necessary adjustments for changes in fair value
Problem 3
LLB Industries borrowed $210,000 from Trust Bank by issuing a two-year, 12% 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 12% fixed interest rate on a notional amount of $210,000 and to pay interest based on a floating interest rate.
Floating (LIBOR) settlement rates were 12% at January 1, 10% at March 31, and 8% at 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. The additional rise in the fair value of the note (higher than that of the swap) on June 30 was due to investors' perceptions that the creditworthiness of LLB was improving.
|
|
January 1
|
March 31
|
June 30
|
|
Fair value of interest rate swap
|
|
0
|
|
$
|
6,572
|
|
$
|
11,594
|
|
|
Fair value of note payable
|
$
|
210,000
|
|
$
|
216,572
|
|
$
|
230,000
|
|
Required:
1. Calculate the net cash settlement at June 30, 2016.
2. Prepare the journal entries on June 30, 2016, to record the interest and necessary adjustments for changes in fair value
Problem 4
On January 1, 2016, LLB Industries borrowed $330,000 from Trust Bank by issuing a two-year, 12% 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 12% fixed interest rate on a notional amount of $330,000 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 12% at January 1, 10% at March 31, and 8% at 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 follows:
|
|
January 1
|
March 31
|
June 30
|
|
Fair value of interest rate swap
|
|
0
|
|
$
|
8,800
|
|
$
|
15,294
|
|
|
Fair value of note payable
|
$
|
330,000
|
|
$
|
338,800
|
|
$
|
345,294
|
|
|
Required:
Prepare the journal entries through June 30, 2016, to record the issuance of the note, interest, and necessary adjustments for changes in fair value.
Problem 5
On January 1, 2016, 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, 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 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, 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. The additional rise in the fair value of the note (higher than that of the swap) on June 30 was due to investors' perceptions that the creditworthiness of LLB was improving.
|
|
January 1
|
March 31
|
June 30
|
|
Fair value of interest rate swap
|
|
0
|
|
$
|
7,600
|
|
$
|
13,494
|
|
|
Fair value of note payable
|
$
|
270,000
|
|
$
|
277,600
|
|
$
|
283,494
|
|
|
|
Required:
1. Calculate the net cash settlement at June 30, 2016.
2. Prepare the journal entries on June 30, 2016, to record the interest and necessary adjustments for changes in fair value.
Problem 6
On January 1, 2016, Labtech Circuits borrowed $140,000 from First Bank by issuing a two-year, 6% note, payable on December 31, 2018. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a two-year interest rate swap agreement on January 1, 2016, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 6% fixed interest rate on a notional amount of $140,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year.
Floating (LIBOR) settlement rates were 6% at inception and 7%, 5%, and 5% at the end of 2016, 2017, and 2018, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows:
|
|
January 1
|
December 31
|
|
|
2016
|
2016
|
2017
|
2018
|
|
Fair value of interest rate swap
|
|
0
|
|
$
|
(2,159
|
)
|
$
|
1,335
|
|
$
|
0
|
|
|
Fair value of note payable
|
$
|
140,000
|
|
$
|
137,841
|
|
$
|
141,335
|
|
$
|
140,000
|
|
|
Required:
1. Calculate the net cash settlement at the end of 2016, 2017, and 2018
2. Prepare the journal entries during 2016 to record the issuance of the note, interest, and necessary adjustments for changes in fair value
Problem 7
On January 1, 2016, Labtech Circuits borrowed $149,800 from First Bank by issuing a three-year, 8% note, payable on December 31, 2018. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2016, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 8% fixed interest rate on a notional amount of $149,800 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year.
Floating (LIBOR) settlement rates were 8% at inception and 9%, 7%, and 7% at the end of 2016, 2017, and 2018, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as follows:
|
|
January 1
|
December 31
|
|
|
2016
|
2016
|
2017
|
2018
|
|
Fair value of interest rate swap
|
|
0
|
|
$
|
(2,200)
|
|
$
|
1,400
|
|
|
0
|
|
|
Fair value of note payable
|
$
|
149,800
|
|
$
|
147,600
|
|
$
|
151,200
|
|
$
|
149,800
|
|
|
|
Required:
1. Calculate the net cash settlement at the end of 2016, 2017, and 2018. (Negative amounts should be indicated by a minus sign.)
2. Using the extended method, prepare the journal entries during 2016 to record the issuance of the note, interest, and necessary adjustments for changes in fair value.