Question

As of 12/31/19, Bayern Corp. had a $100M 3% (annual) fixed-rate note outstanding which is payable on 12/31/23. On 1/1/20, Bayern decides to enter into a 4-year interest rate swap with Juventus Bank. Bayern will receive fixed payments (of 3%, annual) and pay a variable rate based on LIBOR. Assume that interest payments on the note and settlement on the rate exchange are semiannual. The LIBOR-based rate on 1/1/20 is also 3% (annual). The LIBOR-based variable rate is reset every 6 months to determine the variable rate for the subsequent 6 months.

Bayern designates the swap as a fair value hedge and the hedge is deemed highly effective. The swap has no value at inception. Annual LIBOR-based rates and swap and note fair values are indicated below. Assume that Bayern makes fair value adjustments every 6 months.

Annual LIBOR-

Date	based rate	swap fair value	note fair value
6/30/20	2.9%	$330,552	$100,330,552
12/31/20	3.1%	($284,375)	$ 99,715,625
6/30/21	3.05%	($119,479)	$ 99,880,521

Required: Present the journal entries for the following dates/transactions:

(a) The entry to record the semiannual interest payment on the note on 6/30/20.

(b) The entry to record the fair value adjustments to the note and swap on 6/30/20.

(c) The entry to record the semiannual interest payment on the note and the settlement of the interest rate swap on 12/31/20.

(d) The entry to record the fair value adjustments to the note and swap on 12/31/20.

(e) The entry to record the semiannual interest payment on the note and the settlement of the interest rate swap on 6/30/21.

(f) The entry to record the fair value adjustments to the note and swap on 6/30/21.

Answer 1

Answer Page: No 9 w $1,500,000 @ Journal entry to recovered the semmi annual interest payment on the note on 6/30/20 Particular Debit credit Interest $1,500,000 alc expense To accrued interest payable alo $1,500,000 (Being interest payment payable on note one nekalba Accrued interest payable To cash $1,500,000 (Being interest accrued paid by cash ) Semi annual internet payment = $ 100,000,000 x 3% $1,500,000 Journal entry to record the fain valve adjustments to the note & swap on 6/30/20 Particular Debit Credit loms on hedging activity ale $ 330,552 To 3% fixed rate note al $330,552 $330,552 To gain on hedge activiling af $330,55a Lous Principal value of note - Fair value of note = 100,000,000 -1003096 $330,552 Swap contact alc

on 12/31/20 Page: No NO @ © Journal en try to record the semiannual interest payment on the note settlement g the interest rate swaja on Particular Debit Gredit Interest $1,500,000 expense To accoued interest payable alc $1,500,000 (Being interest payment payable on note onnlata Accrued interest payable ale | $1,500,000 To cash ak $1,500,000 (Being interest accrued paid by cash Interest expense al $50,000 To cash alc $50,000 -3% +3:17 - Interest payable on swap as on 12/31) 20 = 100,000,000 X $ 100,000,000 X0.05). $50,000 O ournal erbiy to record fair value adjushcents to the role grund on 12131120 Particular Debit credit 34. fixed rate note alc $ 614,927 To gain on hedge activily ale $614,927 Loms on hedging activily $ 614,927 To swap Contact $614,927

Gain Page: No 100,330,557 – 99,415,625 $614.924 © Journal entry to record semiannual interest payment on the note & settlement of interest rate si ap on 6/20)21 Particular Debit Credit Interest expense $1,500,000 To accrued interest payable $1,500,000 (Being interest payment payable on note on $1,500,000 To cash $1,500,000 (Being interneth accrued paid by cash) 16/2017 Accrued interest payable Interest expense $25000 To cash $25000 Interest 2 payable le on swap as on 6)30)21 = 100,000,000 x 3.05%-3% 100,000,000 X 0.025%, $25000 ® Journal entry to record fier value adjustments to the note swop on 6/3012 Loms = 99,715,605 -99880521 $164,896

NO (4 Debit Credit Los on Particular bedgin activity alc To 3% fixed rate note al $164,896 $164896 $164,896 Swap contract als gain on hedge activity ale $164,896