LLB Industries borrowed $206,000 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 $206,000 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 $ 10,165 March 31 $ 6,772 $ 230,000 June 30 $ 11,994 $ 250,000 September 30 $ 5,222 $ 135 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.
LLB Industries borrowed $206,000 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 $206,000 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 $ 10,165 March 31 $ 6,772 $ 230,000 June 30 $ 11,994 $ 250,000 September 30 $ 5,222 $ 135 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:LLB Industries borrowed $206,000 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 $206,000
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
Required 1
No
1
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.
2
3
Required 2
4
Date
June 30, 2024
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.
General Journal
June 30, 2024
June 30, 2024
June 30, 2024
Interest expense
Cash
Cash
January 1
$ 10,165
Interest expense
X Answer is complete but not entirely correct.
Interest rate swap
Interest expense
March 31
Interest expense
Notes payable
$ 6,772
$ 230,000
< Required 1
✓
✓
>>
33
June 30
$ 11,994
$ 250,000
✓
Required 2
>
Debit
5,750 →
1,150✔
September 30
$ 5,222
$ 135
6,244 X
972 X
Credit
5,750✔
1,150
6,244
972 X
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