Question

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Exercise A-6 (Algo) Derivatives; interest rate swap; fixed-rate debt; fair value change unrelated to hedged (LOA-6] nts On January 1, 2021. 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, 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 $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, 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 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. Fair value of interest rate swap Fair value of note payable January 1 0 $ 270,000 March 31 $ 7,600 $ 277,600 June 30 $ 13,494 $ 290,000 Required: 1. Calculate the net cash settlement at June 30, 2021. 2. Prepare the journal entries on June 30, 2021, to record the interest and necessary adjustments for changes in fair value. Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Calculate the net cash settlement at June 30, 2021. (Round your intermediate and final answer to the nearest whole dollar.) June 30 $ 2,700 Net cash settlement < Required 1 Required 2 >

Answer 1

1		Jan-01	Mar-31	Jun-30
	Fair Value of interest rate swap	$0	$7,600	$13,494
	Fair Value of note payable	$2,70,000	$2,77,600	$2,90,000
	Fixed rate	10%	10%	10%
	Floating rate	10%	8%	6%
	Fixed interest receipts		$6,750	$6,750
	Floating payments		-$5,400	-$4,050
	Net Interest receipts(payments)		$1,350	$2,700
2
			Dr	Cr
Jun-30	Interest Expense		6750
	Cash			6750
	Cash		2700
	Interest Expense			2700
	Interest rate swap		5894
	Holding gain-interest rate swap			5894
	Holding loss-hedged note		12400
	Notes payable			12400