Question

Exercise 17-25 On January 2, 2020, Concord Co. issued a 4-year, $112,000 note at 6% fixed interest, interest payable semiannually. Concord now wants to change the note to a variable-rate note. As a result, on January 2, 2020, Concord Co. enters into an interest rate swap where it agrees to receive 6% fixed and pay LIBOR of 5.60% for the first 6 months on $112,000. At each 6-month period, the variable rate will be reset. The variable rat is reset to 6.70% on June 30, 2020. (a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2020. Net interest expense June 30, 2020 (b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2020. Net interest expense December 31, 2020

Answer 1

Answer
(a) Net interest expense to be reported on June 30,2020= $ 3,136
(b) Net interest expense to be reported on December 31, 2020= $ 3,752
Working Note
Calculation of Net Income Effect
	June-30-2020	Dec-31-2020
Fixed-rate debt	$               112,000.00	$     112,000.00
Fixed rate (6% ÷ 2)	3%	3%
Semiannual debt payment	$                        3,360	$              3,360
Swap fixed receipt	$                        3,360	$              3,360
Net income effect	0	0
Calculation of Swap variable rate
Swap variable rate
5.6% ×6/12 × $112,000	$                        3,136	$                   -
6.7% × 6/12× $112,000	$                              -	$              3,752
Net interest expense	$                        3,136	$                   -
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