Question

Exercise A-5 (Algo) Derivatives; interest rate swap; fixed rate debt; extended method (LOA-6) pints 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. 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: 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 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.)

Answer 1

Refer the below images for the above asked questions, in a detailed way of solution with calculations.

Answer: preparation of journal entries : Date particolars Debt Credit $360000 360000 cash ate or To Notes payable (Being to record the issuance the note) of $ 9000 DY Max 31 Atc. F 9000 Interest expense To cast Alc (Beng to record interest) Working: calculation of interest: = 360000 X 104. x114 Lasarterly = $9000 Dr Mar 31 11200 Cash ALL $ 1800 Interest swap rate Alt or $ 9400 so Interest revenue To Holding gain - interest rate swap (balance) (Being to record the not cast settlement, accrued interest on the swap and change in fair value of the note due to interest). V Worllings -Cash = ($9000 _{[3% +14] x $ 360000}) = $9000 - $ 7200 -81200 Interest rate swap = 8 9400 (får value at Mar 31) - $0) = 99 400 Interest revenue = ([101.70l4]*$0) = $0

Date Cedot Debit 9400 Mar 31 particulars Holding loss hedged note Ale or To Notes payable alc (Being to record change in fair vakre of the note due to interest) $9400 Working : $369400 (incl. interest rate swap) -9360000 = 9 9400 9 7388 June 3o 188 Interest expense al or To Notes payable Cdifference) Alc. To cash mil (Being to record interest) 47200 Workings: 6 Interest expense: = $369400 (inclo interest rate swap] x [21. 114] = $7388 @ cast - $ 360000 4 [10% +144] - $7200 June 3o $188 $8406 cash ale Dr $ 1800 6794 Interest Yote Swap Atc Dr To Interest revenue Ale To Holding gain a interest rate swap (balance) (Being to record the net cast settlement, accrued interest on the Swap and charge in fair value of the derivative ).

Workings: o cash a (17200 - [6 to X114] + $360000) = $7200 - $5400 = 1800 ② Interest rate swap - $16194-89400. =46794 © Interest revenue a [8.1-xily] x 89400 3 9188 June 30 $6606 Holding loss - hedged note , All or $6606 To notes payable Alc. (Being to record change in far value of the note due to interest) 369400 ($ 376194- = $6606 -$188) Ly Notes payable (diff evence) at June 30.