As of 12/31/19, Bayern Corp. had a $100M 3% (annual) fixed-rate note outstanding which is payable onrn12/31/23. On 1/1/20, Bayern decides to enter into a 4-year interest rate swap with Juventus Bank. Bayern will receive fixed payments (of 3%, annual) and pay a variable rate based on LIBOR. Assume that interest payments on the note and settlement on the rate exchange are semiannual. The LIBOR-based rate on 1/1/20 is also 3% (annual). The LIBOR-based variable rate is reset every 6 months to determine the variable rate for the subsequent 6 months.

Bayern designates the swap as a fair value hedge and the hedge is deemed highly effective. The swap has no value at inception. Annual LIBOR-based rates, and swap and note fair values are indicated below. Assume that Bayern makes fair value adjustments every 6 months.

Annual LIBOR-

Date               based rate            Swap Fair Value                   Note Fair Value

6/30/20               2.9%                   $330,552                               $100,330,552

12/31/20             3.1%                  ($284,375)                            $ 99,715,625

6/30/21            3.05%                    ($119,479)                           $ 99,880,521

Required: 

Present the journal entries for the following dates/transactions:

(a) The entry to record the semiannual interest payment on the note on 6/30/20.

(b) The entry to record the fair value adjustments to the note and swap on 6/30/20.

(c) The entry to record the semiannual interest payment on the note and the settlement of the interest rate swap on 12/31/20.

(d) The entry to record the fair value adjustments to the note and swap on 12/31/20.

(e) The entry to record the semiannual interest payment on the note and the settlement of the interest rate swap on 6/30/21.

(f) The entry to record the fair value adjustments to the note and swap on 6/30/21.

Answer rating: 100% (QA)

A Principal value of note 100000000 B Interest rate pa 3 C Interest rate semi annual 150 D Interest payment semi annual AC 1500000 a The entry to reco... View the full answer