Question

On December 31, 2011, Mercantile Corp. had a $10-million, 8% fixed-rate (based in LIBOR) 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 Mercantile will receive interest at a fixed rate of 8% and will pay a variable rate equal to the six-month LIBOR rate, based on the $10-million amount. The LIBOR rate on December 31, 2011, was 7%. 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. Mercantile 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:
Instructions
(a) Present the journal entries to record the following transactions:
1. The entry, if any, to record the swap on December 31, 2011
2. The entry to record the semi-annual debt interest payment on June 30, 2012
3. The entry to record the settlement of the semi-annual swap amount receivable at 8%, less the amount payable at LIBOR, 7%
4. The entry, if any, to record the change in the debt’s fair value at June 30, 2012
5. The entry, if any, to record the change in the swap’s fair value at June 30, 2012
(b) Indicate the amount(s) reported on the statement of financial position and income statement related to the debt and swap on December 31, 2011.
(c) Indicate the amount(s) reported on the statement of financial position and income statement related to the debt and swap on June 30, 2012.
(d) Indicate the amount(s) reported on the statement of financial position and income statement related to the debt and swap on December 31, 2012.


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  • CreatedAugust 23, 2015
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