On December 31, 2017, Concord Corp. had a $12,200,000, 7.0% fixed-rate note outs
ID: 2573954 • Letter: O
Question
On December 31, 2017, Concord Corp. had a $12,200,000, 7.0% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Concord will receive interest at a fixed rate of 7.0% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $12,200,000 amount. The LIBOR rate on December 31, 2017, is 6.0%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.
Concord Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows.
Date
6-Month LIBOR Rate
Swap Fair Value
Debt Fair Value
12,255,770
Present the journal entries to record the following transactions.
The entry to record the change in the fair value of the swap at June 30, 2018.
Question : Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2018. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
6-Month LIBOR Rate
Swap Fair Value
Debt Fair Value
December 31, 2017 6.0 % $12,200,000 June 30, 2018 6.5 % (217,700 ) 11,982,300 December 31, 2018 5.0 % 55,77012,255,770
Explanation / Answer
Journal entries:
Sl. no
Date
Account title
Debit
Credit
1
Dec 31, 2017
No entry required at the time of swap because the fair value id zero at inception
2
June 30, 2018
Interest expense
Cash
($12,200,000*7% *1/2)
427,000
427,000
3
June 30, 2018
Cash
Interest expense
(Cash settlement = swap receivable - payable at LIBOR = ($12,200,000*7% *1/2) - ($12,200,000*6% *1/2)
= 427,000 - 366,000)
61,000
61,000
4
June 30, 2018
Notes payable
Unrealized holding gain or loss- Income
217,700
217,700
5
June 30, 2018
Unrealized holding gain or loss- Income
Swap contract
217,700
217,700
d) statement showing balance sheet and income statement:
Balance sheet:
Assets:
$55,770
Swap contract
Liabilities:
12,255,770
Notes payable
Income statement:
Interest expenses:
First 6 months (427,000- 61,000)
Next 6 months (note)
366,000
396,500
Note: Interest expenses for next 6 months:
Cash settlement = Unadjusted interest expense - (cash settlement interest from June to Dec 2018)
= 427,000 - { swap receivable - payable at LIBOR}
= 427,000 - {($12,200,000*7% *1/2) - ($12,200,000*6.5% *1/2)}
= 427,000 - {427,000 -396,500}
= 427,000 - 30,500 =396,500
Sl. no
Date
Account title
Debit
Credit
1
Dec 31, 2017
No entry required at the time of swap because the fair value id zero at inception
2
June 30, 2018
Interest expense
Cash
($12,200,000*7% *1/2)
427,000
427,000
3
June 30, 2018
Cash
Interest expense
(Cash settlement = swap receivable - payable at LIBOR = ($12,200,000*7% *1/2) - ($12,200,000*6% *1/2)
= 427,000 - 366,000)
61,000
61,000
4
June 30, 2018
Notes payable
Unrealized holding gain or loss- Income
217,700
217,700
5
June 30, 2018
Unrealized holding gain or loss- Income
Swap contract
217,700
217,700
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