Question

Exercise 16-21 On January 2, 2020, Crane Corp. issued a $82,000, four–year note at prime plus 1% variable interest, with interest payable semi–annually. On the same date, Crane entered into an interest rate swap where it agreed to pay 8% fixed and receive prime plus 1% for the first six months on $82,000. At each six–month period, the variable rate will be reset. The prime interest rate is 7.7% on January 2, 2020, and is reset to 8.7% on June 30, 2020. On December 31, 2020, the fair value of the swap has increased by $25,000. Crane follows ASPE and uses hedge accounting. Assume that the swap qualifies for hedge accounting under ASPE.

Calculate the net interest expense to be reported for this note and the related swap transaction as at June 30 and December 31, 2020. June 30 December 31 The net interest expense to be reported $enter a dollar amount $enter a dollar amount Prepare the journal entries relating to the interest for the year ended December 31, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit choose a transaction date June 30, 2020December 31, 2020 enter an account title to record payment of interest enter a debit amount enter a credit amount enter an account title to record payment of interest enter a debit amount enter a credit amount (To record payment of interest.) choose a transaction date June 30, 2020December 31, 2020 enter an account title to record cash received on swap enter a debit amount enter a credit amount enter an account title to record cash received on swap enter a debit amount enter a credit amount (To record cash received on swap.) choose a transaction date June 30, 2020December 31, 2020 enter an account title to record payment of interest enter a debit amount enter a credit amount enter an account title to record payment of interest enter a debit amount enter a credit amount (To record payment of interest.) choose a transaction date June 30, 2020December 31, 2020 enter an account title to record cash received on swap enter a debit amount enter a credit amount enter an account title to record cash received on swap enter a debit amount enter a credit amount (To record cash received on swap.)

Assume, instead, that Crane follows IFRS. Prepare the journal entries for this cash flow hedge. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
December 31, 2020	enter an account title to increase the value of the contract	enter a debit amount	enter a credit amount
	enter an account title to increase the value of the contract	enter a debit amount	enter a credit amount
	(To increase the value of the contract.)
December 31, 2020	enter an account title to record the “fix” under hedge accounting	enter a debit amount	enter a credit amount
	enter an account title to record the “fix” under hedge accounting	enter a debit amount	enter a credit amount
	(To record the “fix” under hedge accounting.)

Answer 1

Calculation of net interest expense to be reported for this note and related swap transaction for June 30 and December 31, 2020

June 30

Interest to be paid @8% = 6560

Interest received @8.7% = 7134

Interest paid on notes = 7134

Net interest paid = 6560-7134+7134 = 6560

December 31

Interest to be paid @8% = 6560

Interest received @9.7% = 7954

Interest paid on notes @9.7%= 7954

Net interest paid = 6560-7954+7954=6560

	June 30	December 31
The net interest expense to be reported	$6,560	$6,560

Journal entries relating to interest for the year ended 31st December 2020

Date	account titles and explanation	debit	Credit
June 30, 2020	interest expense	7,134
	Cash		7,143
	(Payment of interest)		June
June 30, 2020	cash	574
	Interest expense		574
	(Cash received on swap)
December 31, 2020	interest expense	7,954
	Cash		7,954
	(Payment of interest)
December 31, 2020	cash	1,394
	Interest expense		1,394
	(Cash received on swap)

Journal entries for cash flow hedge

Date	account titles and explanation	debit	Credit
December 31, 2020	swap contract	25,000
	Unrealized gain or loss		25,000
	(Increase in the value of contract)
December 31, 2020	unrealised gain or loss	25,000
	Notes payable		25,000
	(To record the fix under hedge accounting)