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LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. • LLB entered into a two-year interest rate swap agreement on January 1, 2024, 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 10% fixed interest rate on a notional amount of $200,000 and to pay interest based on a floating interest rate and rates reset at the beginning of each period. Floating (SOFR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below. The additional rise in the fair value of the note (higher than that of the swap) on June 30 was due to investors' perceptions that the creditworthiness of LLB was improving. Assume LLB uses the shortcut method. Fair value of interest rate swap Fair value of note payable January 1 $ 0 $ 200,000 March 31 $ 6,472 $ 206,472 June 30 $ 11,394 $ 220,000 September 30 $ 9,565 $ 209,565 Required: 1. Calculate the net cash settlement at June 30, 2024. 2. Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. View transaction list 1 To record interest on the note. 2 To record the net cash settlement on the swap. 3 Record the change in fair value of the derivative. 4 Record the change in fair value of the note due to interest. ☑ >

LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. • LLB entered into a two-year interest rate swap agreement on January 1, 2024, 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 10% fixed interest rate on a notional amount of $200,000 and to pay interest based on a floating interest rate and rates reset at the beginning of each period. Floating (SOFR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below. The additional rise in the fair value of the note (higher than that of the swap) on June 30 was due to investors' perceptions that the creditworthiness of LLB was improving. Assume LLB uses the shortcut method. Fair value of interest rate swap Fair value of note payable January 1 $ 0 $ 200,000 March 31 $ 6,472 $ 206,472 June 30 $ 11,394 $ 220,000 September 30 $ 9,565 $ 209,565 Required: 1. Calculate the net cash settlement at June 30, 2024. 2. Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. View transaction list 1 To record interest on the note. 2 To record the net cash settlement on the swap. 3 Record the change in fair value of the derivative. 4 Record the change in fair value of the note due to interest. ☑ >

Financial Accounting Intro Concepts Meth/Uses
Financial Accounting Intro Concepts Meth/Uses
14th Edition
ISBN:9781285595047
Author:Weil
Publisher:Weil
Chapter13: Marketable Securities And Derivatives
Section: Chapter Questions
Problem 30P
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LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. • LLB entered into a two-year interest rate swap agreement on January 1, 2024, 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 10% fixed interest rate on a notional amount of $200,000 and to pay interest based on a floating interest rate and rates reset at the beginning of each period. Floating (SOFR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below. The additional rise in the fair value of the note (higher than that of the swap) on June 30 was due to investors' perceptions that the creditworthiness of LLB was improving. Assume LLB uses the shortcut method. Fair value of interest rate swap Fair value of note payable January 1 $ 0 $ 200,000 March 31 $ 6,472 $ 206,472 June 30 $ 11,394 $ 220,000 September 30 $ 9,565 $ 209,565 Required: 1. Calculate the net cash settlement at June 30, 2024. 2. Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. View transaction list 1 To record interest on the note. 2 To record the net cash settlement on the swap. 3 Record the change in fair value of the derivative. 4 Record the change in fair value of the note due to interest. ☑ >
Transcribed Image Text:LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. • LLB entered into a two-year interest rate swap agreement on January 1, 2024, 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 10% fixed interest rate on a notional amount of $200,000 and to pay interest based on a floating interest rate and rates reset at the beginning of each period. Floating (SOFR) settlement rates were 10% at January 1, 8% at March 31, and 6% at June 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below. The additional rise in the fair value of the note (higher than that of the swap) on June 30 was due to investors' perceptions that the creditworthiness of LLB was improving. Assume LLB uses the shortcut method. Fair value of interest rate swap Fair value of note payable January 1 $ 0 $ 200,000 March 31 $ 6,472 $ 206,472 June 30 $ 11,394 $ 220,000 September 30 $ 9,565 $ 209,565 Required: 1. Calculate the net cash settlement at June 30, 2024. 2. Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the journal entries on June 30, 2024, to record the interest and necessary adjustments for changes in fair value. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. View transaction list 1 To record interest on the note. 2 To record the net cash settlement on the swap. 3 Record the change in fair value of the derivative. 4 Record the change in fair value of the note due to interest. ☑ >
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