**Image Transcription for Educational Website**---**Interest Rate Swap Agreement and Journal Entries****Scenario:**On January 1, 2021, LLB Industries borrowed $270,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly.- **Hedging Strategy:** - LLB entered into a two-year interest rate swap agreement on January 1, 2024, designating the swap as a fair value hedge. The intent was to hedge the risk that general interest rates might decline, consequently increasing the fair value of its debt. - The agreement stipulated receiving payments based on a 10% fixed interest rate on a notional amount of $270,000 and paying interest based on a floating interest rate. The contract required cash settlement of the net interest amount quarterly, with rates set at the beginning of each period. - **Floating (SOFR) settlement rates:** - January 1: 10% - March 31: 8% - June 30 and September 30: 6% - Fair values of the swap are provided by a derivatives dealer, considering the swap highly effective but not perfectly effective. **Fair Value Table for Swap and Note:**| Date | Fair Value of Interest Rate Swap | Fair Value of Note Payable ||---------------|---------------------------------|-----------------------------|| January 1 | $0 | $270,000 || March 31 | $7,172 | $277,172 || June 30 | $12,911 | $234,000 || September 30 | $10,965 | $280,965 |**Task:**Prepare the journal entries through September 30, 2024, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. Use the extended method.**Note:**- Round intermediate and final answers to the nearest whole dollar.- If no entry is required for a transaction/event, select "No journal entry required" in the first account field.--- 5. Record interest on the note.6. Record the net cash settlement, accrued interest on the swap, and change in fair value of the derivative.7. Record change in fair value of the note due to interest rates.8. Record interest on the note.9. Record the net cash settlement, accrued interest on the swap, and change in fair value of the derivative.

Notes Payable :Notes payable refers to a loan from a bank or any other financial institution against security or on a personal guarantee. Notes payable require a formal loan agreement.Interest rate swap :An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period of time.Journal entries:Journal entry records the accounting transactions of a business in a journal book. All the business transactions are recorded in the chronological order using the double entry system of accounting.

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On January 1, 2021, LLB Industries borrowed $270,000 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 $270,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly 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 and September 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Assume that LLB does not elect to use the shortcut method. The swap is deemed highly effective, but it is not assumed to be perfectly effective. Those quotes and the fair values of the note are as follows:

On January 1, 2021, LLB Industries borrowed $270,000 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 $270,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly 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 and September 30, 2024. The fair values of the swap are quotes obtained from a derivatives dealer. Assume that LLB does not elect to use the shortcut method. The swap is deemed highly effective, but it is not assumed to be perfectly effective. Those quotes and the fair values of the note are as follows:

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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