Answered: a) Prepare the journal entries for…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Company B (CB) entered into an interest rate swap contract with Company C (CC) effective January 1, 2020. Specifically, CB agrees to pay CC’s interest and CC will pay CB’s interest. The contract lasts for three years. CB is attempting to hedge their cash flow risk exposure on their floating rate debt on a loan of $ 3,000,000 which is due in full in three years. CC is attempting to hedge their fair value risk exposure on their fixed rate debt of $ 3,000,000 which is also due in three years in full. The notional principal in the swap contract is $ 3,000,000. The fixed rate and variable rate on January 1, 2020 were both 5%. During 2020 the variable rate increased to 6 %.

Required.

(a)

Prepare the journal entries for 2020 for CB and CC using IFRS and ASPE if optional hedge accounting is used. Explain your answer.

(b)

Prepare the journal entries for 2020 for CB and CC using IFRS and ASPE if optional hedge accounting is not used. Explain your answer.

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