On January 1, 2019, Innovative Lab issued a 4-year, $50,000 note to a local bank with fixed
Question:
On January 1, 2019, Innovative Lab issued a 4-year, $50,000 note to a local bank with fixed interest payments based on 6%, payable annually on December 31. In order to hedge the risk of fixed interest payment, Innovative Lab entered into a 4-year interest rate swap agreement on January 1, 2019, calling for interest payments tied to LIBOR to a counterparty, receipt of interest-based on 6%, negotiated at a notional amount of $50,000. The settlement date for the net cash payment is on December 31 of each year. The following table provides additional information related to the interest rate swap as forecasted over the next 4 years.
Dec. 31, 2019 | Dec. 31, 2020 | Dec. 31, 2021 | Dec. 31, 2022 | |
---|---|---|---|---|
Fair value: Interest rate swap | $200 | $400 | $- | $- |
Fair value: note payable | 50,200 | 50,400 | 50,000 | 50,000 |
LIBOR | 4.2% | 4.0% | 5.2% | 5.8% |
Required
a. Record the required journal entries for years 2019, 2020, 2021, and 2022 related to the note payable and interest rate swap agreement.
Note: If a journal entry (or a line of the journal entry) isn't required for the transaction, select "N/A" as the account names and leave the Dr. and Cr. answers blank (zero).
Date | Account | Debit | Credit |
---|---|---|---|
Jan. 1, 2019 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record issuance of note | |||
Dec. 31, 2019 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest paid | |||
Dec. 31, 2019 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest received | |||
Dec. 31, 2019 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust fair value interest rate swap | |||
Dec. 31, 2019 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust fair value of note payable | |||
Dec. 31, 2020 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest paid | |||
Dec. 31, 2020 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest received | |||
Dec. 31, 2020 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust fair value interest rate swap | |||
Dec. 31, 2020 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust the fair value of notes payable | |||
Dec. 31, 2021 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest paid | |||
Dec. 31, 2021 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest received | |||
Dec. 31, 2021 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust fair value interest rate swap | |||
Dec. 31, 2021 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust the fair value of notes payable | |||
Dec. 31, 2022 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest paid | |||
Dec. 31, 2022 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record interest received | |||
Dec. 31, 2022 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust fair value interest rate swap | |||
Dec. 31, 2022 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To adjust the fair value of notes payable | |||
Dec. 31, 2022 | AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer |
AnswerCashInventoryCall OptionFutures ContractPut OptionSwapFair Value AdjustmentNote PayableCost of Goods SoldInterest ExpenseUnrealized Gain or Loss OCILoss on Settlement of Call OptionUnrealized Gain or Loss IncomeN/A | Answer | Answer | |
To record payment on the note |
b. Compute the effect on net income for each year, 2019 through 2022, ignoring income tax.
Note: Indicate a decrease in net income with a negative sign.
Net Income effect | |
---|---|
2019 | Answer |
2020 | Answer |
2021 | Answer |
2022 | Answer |
c. What change(s) in the forecast would make the interest rate swap more valuable than it is projected to be currently?
Intermediate Accounting IFRS
ISBN: 978-1119372936
3rd edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield