Probdem 17B-15 (Part Level Subenission) On December 3 t 2017, Concord Corp. had
ID: 2573835 • Letter: P
Question
Probdem 17B-15 (Part Level Subenission) On December 3 t 2017, Concord Corp. had a si 2.200 000, 70% fixed rate note outstandng, payable in 2 years it decades to enter mo a 2 year snap we aika Fnt Bak to e n et the h ed rate debt to va atle-rate debt. The terms of the s apnd ate that Ca cond wil receiver teresta ank drate of 7.0%andwilipa, a ea stie ratemaal t the moth ti a e based on the m 0,00 a un ne u tate on December 31, 2017, is 6.0%·The LBOR rate wnW be reset every 6 months and will be used to determine the varatie ate to be pad 'or the Concord Corp designates the swap as a fair valun hedge. Assume thet the hedging relationshp meets all the conditions necessany for hedge accounting The 6-month LiBoR rate and the swap and delt fair values are as fellows. 6 Honth LIBOR Rate Swap Fair Value December 31, 2017 lune 30, 2018 December 31, 2018 6.0% 65% 5.0% Delt Fair Value $12,200,000 1,982,300 12,255,770 (217,700 55,770 (a) Present the journal entries to record the following trarnactions (1) The entry, if any, to record the swap on December 31, 2017 (2) The entry to record the semianeual debt interest paymert on hune 30, 2018 (3) The entry to record the settlement of the semiannual swap 'mort recevables at 7 (4) The entry to record the change in the far valus of the delk on Aune 30, 2018 (5) The entry to record the change in the fair value of the swap at hune 30, 2018. less wnou" payable art IBOR, 60% for the onts) (Cresit account titles are automatically indented wben amount is entered. Do not indent manually. If ao entry is requirest, select "No Entry" for the account titles and enter No Date Accoent Titles and E!anation Debit Credit All Rights Reserved ADivnian ofahltilo sens. nc. 4
Explanation / Answer
Journal entries:
Sl. no
Date
Account title
Debit
Credit
1
Dec 31, 2017
No entry required at the time of swap because the fair value id zero at inception
2
June 30, 2018
Interest expense
Cash
($12,200,000*7% *1/2)
427,000
427,000
3
June 30, 2018
Cash
Interest expense
(Cash settlement = swap receivable - payable at LIBOR = ($12,200,000*7% *1/2) - ($12,200,000*6% *1/2)
= 427,000 - 366,000)
61,000
61,000
4
June 30, 2018
Notes payable
Unrealized holding gain or loss- Income
217,700
217,700
5
June 30, 2018
Unrealized holding gain or loss- Income
Swap contract
217,700
217,700
d) statement showing balance sheet and income statement:
Balance sheet:
Assets:
$55,770
Swap contract
Liabilities:
12,255,770
Notes payable
Income statement:
Interest expenses:
First 6 months (427,000- 61,000)
Next 6 months (note)
366,000
396,500
Note: Interest expenses for next 6 months:
Cash settlement = Unadjusted interest expense - (cash settlement interest from June to Dec 2018)
= 427,000 - { swap receivable - payable at LIBOR}
= 427,000 - {($12,200,000*7% *1/2) - ($12,200,000*6.5% *1/2)}
= 427,000 - {427,000 -396,500}
= 427,000 - 30,500 =396,500
Sl. no
Date
Account title
Debit
Credit
1
Dec 31, 2017
No entry required at the time of swap because the fair value id zero at inception
2
June 30, 2018
Interest expense
Cash
($12,200,000*7% *1/2)
427,000
427,000
3
June 30, 2018
Cash
Interest expense
(Cash settlement = swap receivable - payable at LIBOR = ($12,200,000*7% *1/2) - ($12,200,000*6% *1/2)
= 427,000 - 366,000)
61,000
61,000
4
June 30, 2018
Notes payable
Unrealized holding gain or loss- Income
217,700
217,700
5
June 30, 2018
Unrealized holding gain or loss- Income
Swap contract
217,700
217,700
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