has note due in 2 years. The note is paid on June 30 and December 31 4. On June
ID: 2328843 • Letter: H
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has note due in 2 years. The note is paid on June 30 and December 31 4. On June 30, 2017, Ren Company had a $500,000, 7.4% fixed rate been outstanding since May 26, 2016 and the interest on the note each year. The controller of Ren believed that interest rates would drop over the next two years, So entered into a 2-year swap with Coruscant National Bank. According to the agreement, Ren Comp will receive interest at a fixed rte of 7.4% and will pay a variable rate as determined by LIBOR The LIBOR on June 30, 2017 was 7 190 The swap agreement calls for the variable rate to be reset each six any months. The swap fair value on December 31, 2017 was $6,300. Note: Assume the fair value of the swap at inception is zero. Required: 1. Identify the type of hedge. Present the journal entries, if any, to record the following events: The journal entries to record the semiannual interest payment on the debt and the 2. a. settlement of the semiannual swap on December 31, 2017. The journal entries to record changes in fair value required by the above information on December 31, 2017. b.Explanation / Answer
1 Interest rate swap is Fair value hedge. 2 Journal Entries a Journal entry for semiannual interest payment on debt 30-Jun-17 Interest expense 18500 Cash $18,500 31-Dec-17 Interest expense $18,500 Cash $18,500 ($500000 x 7.4% x 1/2) Journal entry for settlement of semiannual swap 31-Dec-17 Cash 750 Interest income $750 ($500000 x (7.4%-7.1%) x 1/2) b Journal entry to record changes in fair value on Dec 31, 2017 31-Dec-17 Swap Contract $6,300 Gain on interest rate swap $6,300
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