APPENDIX PROBLEMS #3

Exercise A-5 (Algo) Derivatives; interest rate swap; fixed rate debt; extended method [LOA6]

On January 1, 2021, LLB Industries borrowed $370,000 from Trust Bank by issuing a two-year, 12% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2021, 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 8% fixed interest rate on a notional amount of $370,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly. Floating (LIBOR) settlement rates were 8% at January 1, 6% at March 31, and 4% at June 30, 2021. 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			March 31			June 30
Fair value of interest rate swap		0		$	9,600		$	16,494
Fair value of note payable	$	370,000		$	379,600		$	386,494

Required: Prepare the journal entries through June 30, 2021, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate and final answers to the nearest whole dollar.)

X Answer is not complete. No Date General Journal Debit Credit 1 January 01 Cash 370,000 Notes payable 370,000 2 March 31 Interest expense 7,400 Cash 7,400 3 March 31 Cash 9,600 Interest rate swap 9,600 4 March 31 . 9,600 Interest rate swap Notes payable 9,600 5 June 30 5,694 Interest expense Notes payable 144 X Cash 5,550 X 6 June 30 Cash 1,850 X 6,894 Interest rate swap Interest revenue 144 Interest rate swap X 8,600 7 June 30 x 6,750 Interest rate swap Notes payable 6,750