Question

On December 31, 2020, Blossom Corp. had a $9-million, 9% fixed-rate note outstanding that was payable in two years. It decided to enter into a two-year swap with First Bank to convert the fixed-rate debt to floating-rate debt. The terms of the swap specified that Master will receive interest at a fixed rate of 9% and will pay a variable rate equal to the six-month LIBOR rate, based on the $9-million amount. The LIBOR rate on December 31, 2020, was 8.00%. The LIBOR rate will be reset every six months and will be used to determine the variable rate to be paid for the following six-month period. Blossom Corp. designated the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting and that IFRS is a constraint. The six-month LIBOR rate and the swap and debt fair values were as follows:

Date Dec. 31, 2020 June 30, 2021 Dec. 31, 2021 6-Month Swap Debt LIBOR Rate Fair Value Fair Value 8.00% $9,000,000 8.50% $(200,000) 8,800,000 7.00% 60,000 9,060,000

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 semi-annual debt interest payment on June 30, 2021
3.		The entry to record the settlement of the semi-annual swap amount receivable at 9%, less the amount payable at LIBOR, 8.00%
4.		The entry, if any, to record the change in the swap’s fair value at June 30, 2021
5.		The entry, if any, to record the change in the debt’s fair value at June 30, 2021

Answer 1

Answer

(b) (1)                                              December 31, 2020

No entry required at the date of the swap because the fair value of the swap at inception is zero.

(2)                                                 June 30, 2021

Interest Expense...........................................................................	405,000
Cash.....................................................................................		405,000
($9,000,000 X 9% X 6/12)

(3)                                                 June 30, 2021

Cash	45000
Interest Expense .........................................................		45000
[$9,000,000 X (9% – 8%) X 6/12]
	Interest Received (Paid)
Swap receivable (9% X $9,000,000 X 1/2)........................	$ 405000
Payable at LIBOR (8% X 9,000,000 X 1/2)......................	(360000)
Cash settlement....................................................................	45000

(4)                                               June 30, 2021

Notes Payable.........................................................................	200,000
Unrealized Gain or Loss ...............................................		200,000

(5)                                               June 30, 2021

Unrealized Gain or Loss.........................................................	200,000
Derivatives–Financial Assets/Liabilities........................		200,000