Answered: Delta Company issues 10,000,000…

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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Delta Company issues 10,000,000 variable-rate debt at par with a coupon rate of 6% on 1/1/X1 that pays interest quarterly and enters into an interest-rate swap that is used to hedge the debt to produce fixed-rate debt. The swap has a fair value of zero initially. The swap resets each quarter on the last day of the quarter and is perfectly effective. At 12/31/X1 the variable rate changes to 6.5%, which will cause a change in fair value of the derivative. Prepare any journal entries for 12/31/X1 & prepare any journal entries for 3/31/X2. 6.00% Swap Change Date Interest paid Fair value debt Fair value fair values Net cash 12/31/X1 $150,000 $10,000,000 $174,900 $174,900 $0 3/31/X2 $162,500 $10,000,000 $165,200 ($9,700) $12,500

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