On January 2, 2014, Yellowknife Corp. issues a $10-million, five-year note at LIBOR, with interest paid annually. To protect against the cash flow uncertainty related to interest payments that are based on LIBOR, Yellowknife entered into an interest rate swap to pay 6% fixed and receive LIBOR based on $10 million for the term of the note. The LIBOR rate for the first year is 5.8%. The LIBOR rate is reset to 6.6% on January 2, 2015. Yellowknife follows ASPE and uses hedge accounting. Assume that the criteria for hedge accounting under ASPE are met.
Instructions
(a) Calculate the net interest expense to be reported for this note and related swap transactions as of December 31, 2014, and 2015.
(b) Prepare the journal entries relating to the interest for the years ended December 31, 2014, and 2015.
(c) Explain why this is a cash flow hedge.
(d) Explain how the accounting would change if the company were to use hedge accounting under IFRS.