On January 1, 2024, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note,
Question:
On January 1, 2024, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly.
∙ LLB entered into a two-year interest rate swap agreement on January 1, 2024, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase.
∙ The agreement called for the company to receive payment based on a 10% fixed interest rate on a notional amount of $200,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly and rates reset at the beginning of each period.
∙ Floating (SOFR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30 and September 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below. Assume LLB uses the shortcut method.
Required:
1. Calculate the net cash settlement at March 31, June 30, and September 30, 2024.
2. Prepare the journal entries through September 30, 2024, to record the issuance of the note, interest, and necessary adjustments for changes in fair value.
3. Repeat requirements 1 and 2 through June 30, 2024, assuming that rates reset in arrears.
Step by Step Answer:
Requirement Note This is a fair value hedge swapping a fixed interest rate for a variable interest rate Thus if the variable rate is less than the fixed rate cash will be collected in the net settleme...View the full answer
