Anchovy Corp. issued a $1-million, four-year, 7.5% fixed-rate interest only, nonprepayable bond on December 31, 2016. Anchovy later decided to hedge the interest rate and change from a fixed rate to variable rate, so it entered into a swap agreement with M&S Corp. The swap agreement specified that Anchovy will receive a fixed rate of 7.5% and pay variable rate interest with settlement dates that match the interest payments on the instrument. Assume that interest rates declined during 2017 and that Anchovy received $13,000 as a net settlement on the swap for the settlement at December 31, 2017. The loss related to the debt (due to interest rate changes) was $48,000. The value of the swap contract increased by $48,000. The company follows IFRS. Assume criteria for hedge accounting are met and that the company has chosen to use hedge accounting.
Instructions
(a) For this transaction:
1. Identify the hedged item.
2. Identify the hedging item.
3. Identify how the hedged item would be accounted for without hedge accounting.
4. Identify how the hedging item is accounted for.
5. Indicate how the gains and losses for the hedged and hedging items are recognized.
(b) Prepare the journal entry to record the payment of interest on December 31, 2017.
(c) Prepare the journal entry to record the receipt of the swap settlement on December 31, 2017.
(d) Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2017.
(e) Prepare the journal entry to record the change in the fair value of the bond on December 31, 2017 (under hedge accounting).
(f) Explain why fair value hedge accounting can be applied to this hedge.
(g) Assume that the company applies hedge accounting under ASPE. How would the journal entries change?