Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Chapter A, Problem 5E
To determine
Derivatives: Derivatives are some financial instruments which are meant for managing risk and safeguard the risk created by other financial instruments. These financial instruments derive the values from the future value of underlying security or index. Some examples of derivatives are forward contracts, interest rate swaps, futures, and options.
Interest rate swap: This is a type of derivative used by two parties under a contract to exchange the consequences (net cash difference between interest payments) of fixed interest rate for floating interest rate, or vice versa, without exchanging the principal or notional amounts.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
To journalize: The entries of issue of note, interest payments, and
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On January 1, 2024, LLB Industries borrowed $212,000 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 $212,000
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. Those quotes and the fair values of the note are as indicated
below. Assume LLB uses the shortcut method.
Fair value of…
On January 1, 2024, LLB Industries borrowed $210,000 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 $210,000
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. Those quotes and the fair values of the note are as indicated
below. Assume LLB uses the shortcut method.
Fair value…
On January 1, 2024, Avalanche Corporation borrowed $124,000 from First Bank by issuing a two-year, 8% fixed-rate note with annual interest payments. The principal of the note is due on December 31, 2025.
Avalanche wanted to hedge against declines in general interest rates, so it also entered into a two-year SOFR-based interest rate swap agreement on January 1, 2024, and designates it as a fair value hedge. Because the swap is entered at market rates, the fair value of the swap is zero at inception.
The agreement called for the company to receive fixed interest at the current SOFR swap rate of 5% and pay floating interest tied to SOFR. This arrangement results in an effective variable rate on the note of SOFR + 3%.
The contract specifies that the floating rate resets each year on June 30 and December 31 for the net settlement that is due the following period. In other words, the net cash settlement is calculated using beginning- of-period rates.
The SOFR rates on the swap reset dates…
Chapter A Solutions
Intermediate Accounting
Ch. A - Prob. A.1QCh. A - Prob. 2QCh. A - Prob. A.2QCh. A - Prob. 3QCh. A - Prob. A.3QCh. A - Prob. 4QCh. A - Prob. A.4QCh. A - What is the effect on interest of an interest rate...Ch. A - Prob. A.5QCh. A - How are derivatives reported on the balance sheet?...
Ch. A - Prob. A.6QCh. A - When is a gain or a loss from a cash flow hedge...Ch. A - Prob. A.7QCh. A - Prob. 1ECh. A - Prob. A.1ECh. A - Derivatives; interest rate swap; fixed rate debt...Ch. A - Derivatives; interest rate swap; fixed rate...Ch. A - Derivatives; interest rate swap; fixed rate debt;...Ch. A - Prob. 5ECh. A - Derivatives; interest rate swap; fixed-rate debt;...Ch. A - Derivatives; interest rate swap On January 1,...Ch. A - Derivatives; interest rate swap; comprehensive...Ch. A - Derivatives; interest rate swap; fixed rate debt;...Ch. A - Real World Case A1 Derivative losses; recognition...Ch. A - Research Case A4 Issue related to the derivatives...Ch. A - Prob. A.4BYP
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