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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.

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.

FINANCIAL ACCOUNTING
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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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
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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