On January 1, 2021., Labtech Circuits borrowed $270,000 from First Bank by issuing a three-year, 9%...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
On January 1, 2021., Labtech Circuits borrowed $270,000 from First Bank by issuing a three-year, 9% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 9% fixed interest rate on a notional amount of $270,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 9% at inception and 10%, 8%, and 8% at the end of 2021, 2022. and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as follows: January 1 2021 December 31 2023 Fair value of interest rate awap Fair value of note payable 2021 $ (3,300) 2022 $ 2,500 $272,500 $270, 000 $266, 700 $270,000 1. Calculate the net cash settlement at the end of 2021, 2022, and 2023. 2. Prepare the journal entries during 2021 to record the issuance of the note, interest, and necessary adjustments for changes in fair value. 3. Prepare the journal entries during 2022 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value. 4. Prepare the journal entries during 2023 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt. 5. Calculate the book values of both the swap account and the note in each of the three years. 6. Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.) 7. Suppose the fair value of the note at December 31, 2021, had been $247,000 rather than $266,700 with the additional decline in fair value due to investors' perceptions that the creditworthiness of Labtech was worsening. How would that affect your entries to record changes in the fair values? On January 1, 2021., Labtech Circuits borrowed $270,000 from First Bank by issuing a three-year, 9% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 9% fixed interest rate on a notional amount of $270,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 9% at inception and 10%, 8%, and 8% at the end of 2021, 2022. and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as follows: January 1 2021 December 31 2023 Fair value of interest rate awap Fair value of note payable 2021 $ (3,300) 2022 $ 2,500 $272,500 $270, 000 $266, 700 $270,000 1. Calculate the net cash settlement at the end of 2021, 2022, and 2023. 2. Prepare the journal entries during 2021 to record the issuance of the note, interest, and necessary adjustments for changes in fair value. 3. Prepare the journal entries during 2022 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value. 4. Prepare the journal entries during 2023 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt. 5. Calculate the book values of both the swap account and the note in each of the three years. 6. Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.) 7. Suppose the fair value of the note at December 31, 2021, had been $247,000 rather than $266,700 with the additional decline in fair value due to investors' perceptions that the creditworthiness of Labtech was worsening. How would that affect your entries to record changes in the fair values?
Expert Answer:
Answer rating: 100% (QA)
1 Net Cash Settlement 2021 2022 2023 Swap Receivable 2700009 24300 24300 24300 Payable at LIBOR 2700... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
Posted Date:
Students also viewed these accounting questions
-
On January 1, 2011, Labtech Circuits borrowed $100,000 from First Bank by issuing a three-year, 8% note, payable on December 31, 2013. Labtech wanted to hedge the risk that general interest rates...
-
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, 2018, and...
-
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, 2011 and...
-
Suggest two reasons why the adjustments proposed by independent auditors more often than not call for reducing recorded earnings.
-
An overhanging beam ABC of height h has a guided support at A and a roller at B. The beam is heated to a temperature T1 on the top and T2 on the bottom (see figure). Determine the equation of the...
-
Selected balance sheet accounts for Gardner Company are presented below. Required: Analyze each account and recreate the journal entries that were made. For deferrals, be sure to include the original...
-
Describe a patients rights during labor disputes.
-
Check the fundamental theorem for gradients, using T = x2 + 4xy + 2yz3, the points a = (0, 0, 0), b = (1, 1, 1), and the three paths in Fig. 1.28:? (a) (0,0.0) ??? (1.0, 0) ??? (1, 1,0) ??? (1,...
-
You prepare to communicate to stakeholders about an analysis project. You consider how to capture and hold people's interest and attention. What aspect of data storytelling does this scenario...
-
(a) The steps in the accounting cycle for a merchandising company differ from the steps in the accounting cycle for a service company. Do you agree or disagree? (b) Is the measurement of net income...
-
ft lbf lbm is to be siphoned from a tank. The friction loss in the line is F = 0.8 m/ft3 lbm Gasoline p = 50 how long it will take to siphon 5.0 gal, neglecting the change in liquid level in the...
-
What is the amount of the payments that Alan Winslow must make at the end of each of 8 years to accumulate a fund of $95,100 by the end of the 8th year, if the fund earns 8% interest, compounded...
-
I am confused about the relationship between entropy of a polymer solution and the solubility of the polymers. Why does the larger polymer separate out first (from a solution with different size...
-
If a hydrant has a Cd of 0.8 and 2 1/2-inch (2.5 in) diameter outlets, what flow in GPM would be reflected by a pitot reading of 48 PSI?
-
A parallel circuit with a potential of 5.0 V has two resistors with values R 1 = 2.0 and R 2 = 2.0 . What is the current of the circuit?
-
A hand-winding watch is controlled by a mechanism that includes a spiral wire and a wheel 2 . 5 mm radio. The rotational inertia of the wheel is 8 * * 1 0 - 1 1 Kg* * m 2 , and the frequency of its...
-
Locate the number of integers bigger than 7000 which can be obtained with the digits 3,5,7,8,9 without the repetition of any of these digits?
-
In a nonmagnetic medium, E = 50 cos (10 9 t 8x) a y + 40 sin (10 9 t 8x) a z V/m find the dielectric constant r and the corresponding H.
-
Ayres Services acquired an asset for $80 million in 2011. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the...
-
Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011.
-
Prepare a time diagram for the present value of a four-year annuity due of $200. Assume an interest rate of 10% per year.
-
Describe the process of determining a nominal interest rate.
-
How does risk affect the financial management of sport organizations?
-
Of MLB, the NBA, and the NHL, which league has the most risk, and which has the least? Why?
Study smarter with the SolutionInn App