On January 2, 2017, Thompson Corp. issued a $100,000, four-year note at prime plus 1% variable interest, with interest payable semi-annually. On the same date, Thompson entered into an interest rate swap where it agreed to pay 6% fixed and receive prime plus 1% for the first six months on $100,000. At each six-month period, the variable rate will be reset. The prime interest rate is 5.7% on January 2, 2017, and is reset to 6.7% on June 30, 2017. On December 31, 2017, the fair value of the swap has increased by $25,000. Thompson follows ASPE and uses hedge accounting. Assume that the swap qualifies for hedge accounting under ASPE.
Instructions
(a) For this transaction:
1. Identify the hedged item.
2. Identify the hedging item.
3. Identify how the hedged item is being accounted for without hedge accounting.
4. Identify how the hedging item is accounted for.
5. Indicate how the gains and losses for the hedged and hedging items are recognized.
(b) Calculate the net interest expense to be reported for this note and the related swap transaction as at June 30 and December 31, 2017.
(c) Prepare the journal entries relating to the interest for the year ended December 31, 2017.
(d) Explain why this is a cash flow hedge.
(e) Assume, instead, that Thompson follows IFRS. Prepare the journal entries for this cash flow hedge.