Question

PLEASE PUT SOLUTION IN THE SAME FORMAT AS THE IMAGE. THANK YOU!

Exercise A-5 (Algo) Derivatives; interest rate swap; fixed rate debt; extended method [LOA-6] On January 1, 2021, LLB Industries borrowed $360,000 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, 2021, 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 $360,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly. Ipped Floating (LIBOR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30, 2021. 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: Book Fair value of interest rate swap Fair value of note payable January 1 0 $360,000 March 31 $ 9,400 $ 369,480 June 30 $ 16, 194 $376,194 Hint Ask Required: Prepare the journal entries through June 30, 2021, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to the nearest whole dollar.) Print

Answer 1

Following are the journal entries as per the requirement of the questions : -

1. Journal entries to record the issuance of 10% note :-

Date	General journal	Debit	Credit
January 1	Cash	$360000
	Note Payable		$360000
To record note payable, maturity after two years.

2. Journal entries to record the interest :-

Date	General journal	Debit	Credit
March 31	Interest Expense (Note 1)	$9000
	Interest payable		$9000
Interest made due quarterly @ 10% for 3 months

Date	General journal	Debit	Credit
March 31	Interest payable	$9000
	Cash		$9000
To Interest paid for 3 months.

Note 1) Calculation of Interest :-

Amount borrowed * interest rate* time

$360000*0.10*3/12 = $9000

                                                                                     

3. Journal entries for net cash settlement of interest on swap :-

Date	General journal	Debit	Credit
March 31	Cash	$1800
	Interest Income (Note 2)		$1800
To net cash settlement on swap contract.

Note 2) Calculation of net cash settlement of interest on swap :-

Contract amount * (Fixed Interest rate – Floating (LIBOR) rate as on march 31) * 3/12

= $360000 * (0.10 – 0.08 )*3/12

= $1800

Journal entries for accrued interest for the swap :-

• No Journal entry required.

Journal entries for change in the fair value of deriviative :-

Date	General journal	Debit	Credit
March 31	Swap contract	$9400
	Gain on fair value of swap contract		$9400
To gain on fair value of interest rate swap contract.

4. Journal entries for change in the fair value of the note due to interest:-

Date	General journal	Debit	Credit
March 31	Loss on fair value of note payable	$9400
	Note payable ( $369400 - $360000)		$9400
To change in the fair value of note payable due to interest.

5. Journal entries for interest on note as on june 30^th :-

Date	General journal	Debit	Credit
June 30	Interest Expense (Note 3)	$9000
	Interest payable		$9000
Interest made due quarterly @ 10% for 3 months

Date	General journal	Debit	Credit
June 30	Interest payable	$9000
	Cash		$9000
To Interest paid for 3 months.

Note 3) Calculation of Interest :-

Amount borrowed * interest rate* time

$360000*0.10*3/12 = $9000

6. Journal entries for net cash settlement of interest on swap :-

Date	General journal	Debit	Credit
June 30	Cash	$3600
	Interest Income (Note 4)		$3600
To net cash settlement on swap contract.

Note 4) Calculation of net cash settlement of interest on swap :-

Contract amount * (Fixed Interest rate – Floating (LIBOR) rate as on march 31) * 3/12

= $360000 * (0.10 – 0.06 )*3/12

= $3600

Journal entries for accrued interest for the swap :-

• No Journal entry required.

Journal entries for change in the fair value of deriviative :-

Date	General journal	Debit	Credit
March 31	Swap contract	$6794
	Gain on fair value of swap contract ( $16194 - $9400)		$6794
To gain on fair value of interest rate swap contract.

7. Journal entries for change in the fair value of the note due to interest:-

Date	General journal	Debit	Credit
March 31	Loss on fair value of note payable	$6794
	Note payable ( $376194 - $369400)		$6794
To change in the fair value of note payable due to interest.