Question

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On January 1, 2021, S&S Corporation invested in LLB Industries' negotiable two-year, 8% 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, 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 investment to increase. The agreement called for the company to make payment based on a 8% fixed interest rate on a notional amount of $290,000 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 8% at January 1.6% at March 31, and 4% June 30, 2021. 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: Fair value of interest rate swap Fair value of the investment in notes January 1 © $ 290,00 March 31 $ 7.372 $ 297,372 June 30 $ 13,194 $ 303, 194 Required: 1. Calculate the net cash settlement at March 31 and June 30, 2021. 2. Prepare the journal entries through June 30, 2021, to record the investment in notes, interest, and necessary adjustments for changes in fair value. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Calculate the net cash settlement at March 31 and June 30, 2021. March 31 June 30 Net cash settlement Required 1 Required 2 >

Answer 1

Anscoe Page: No 0. O net cashe settlement at March 31,2021 = 290,000 X27X E 320,000* 29.x (8%-6) = 290,000 X 27.x3 121.-2% - Jan to Mars \ 3 months $1450 Het cash settlement at June 30,2021 = 290,000 X 40%. 1 3 12: . Man 31 to Jones 3 months = $2900 (8% -4% [= 4% ] March 31 June 30 $1450 $2900 Net cash Settlement " UUNNANNA @ Journal entries O Record the investment of the note Credit Date . Jan I, 2021 General jowrnal Debit Investment in LLB industries notesak $290,000 . To cash ale $290,000

Page. No @ © Date Debit I credit Record the interest 1. General journal Mar 31, Cash ale To interest income $ 5800 2021 | $ 5800 Cash = 290,000 X 84 2 = $5800 7o necord the net cash settlement bate General journal . Debit Mar 31, Sebtlement interest ale $1450 To cash Coredit 2021 $1450 Record change in fain value of the derivative Date General journal Debits Loss on Swap hedge al . $7342 1. To Swop hedge alc 1 Credit Mori 3 2021 $7372 hoss on Susup hedge al = 297372 - 290000 .= $7372

Page.no me of the investment Credit Record change in fair valuve of the investment Date General journal l Debit Man 3', Investment in 48 industries notes alc * +372 To fair value reserve ale © Record the interest 2021 $4372 pate 1. Gedit General journal Cash ak To interest income Debit $5800 June 30) 2021 1 $5800 Record net cash settlement Date Gedit I General journal Debit June 30, Settlement interest ale $2900 2031 To cash ale $2900 Record the change in fain value of the derivative Loss on swap hedge ale = 303194 - 094372). = $5802

Date Page.no General journal Debit Credit Loss on swap hedge ale $5822 | To swap hedge al $5822 @ Record the change in fair value of the investment June 30,1 2021 | Credit Date 1. General Journal June 30 Prvestment in H1B industries notes alc 2021 To facer valere reserve alc: Debit $5822 - $5822