Question

On December 31, 2020, Cheyenne Corp. had a $11,800,000, 8.0% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2- year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Cheyenne will receive interest at a fixed rate of 8.0% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $11,800,000 amount. The LIBOR rate on December 31, 2020, is 7.0%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period. Cheyenne Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows. Date December 31, 2020 June 30, 2021 December 31, 2021 6-Month LIBOR Rate Swap Fair Value Debt Fair Value 7.0 % $11,800,000 7.5% (206,000) 11,594,000 6.0 % 61,000 11,861,000 Present the journal entries to record the following transactions. (1) The entry, if any, to record the swap on December 31, 2020. (2) The entry to record the semiannual debt interest payment on June 30, 2021. (3) The entry to record the settlement of the semiannual swap amount receivables at 8.0%, less amount payable at LIBOR, 7.0%. (4) The entry to record the change in the fair value of the debt on June 30, 2021. (5) The entry to record the change in the fair value of the swap at June 30, 2021.

Answer 1

Date	Particulars	Debit	Credit
31 Dec,2020	Variable Interest Rate Receivable_______A/c	0
	To Fixed Interest Rate Payable A/c		0
	(Being swap entered into to pay variable rate and receive fixed rate of interest)
30 Jun, 2021	Interest Expense A/c_______________Dr.	472000
	To Interest Payable A/c		472000
	(Being Interest Accrued)
30 Jun, 2021	Interest Payable A/c___________ Dr.	472000
	To Bank	-	472000
	(Being Interest paid)
30 Jun, 2021	Fixed Interest Receivable A/c______________Dr.	472000
	To Variable Interest Payable A/c	-	413000
	To Swap Gains	-	59000
	(Being variable interest paid and flexible interest received - settlement)
30 Jun, 2021	Debt Payable A/c_______________Dr.	206000	-
	To Gain on fair value changes	-	206000
	(Being gain on remeasurement of debt liability)
30 Jun, 2021	Variable Interest Rate Receivable A/c_________Dr.	61000	-
	To Gain on fair value changes	-	61000
	(Being value changes in swap recorded)