Sarazan Corp. purchased a $1-million, four-year, 7.5% fixed-rate interest only, non-prepayable bond on December 31, 2011. The
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and receive variable rate interest with settlement dates that match the interest payments on the instrument. Assume that interest rates increased during 2012 and that Sarazan received $13,000 as a net settlement on the swap for the settlement at December 31, 2012. The loss related to the investment (due to interest rate changes) was $48,000. The value of the swap contract increased by $48,000.
Instructions
(a) Prepare the journal entry to record the receipt of interest on December 31, 2012, from the company that issued the bond.
(b) Prepare the journal entry to record the receipt of the swap settlement on December 31, 2012.
(c) Prepare the journal entry to record the change in the fair value of the swap contract on December 31, 2012.
(d) Prepare the journal entry to record the change in the fair value of the bond on December 31, 2012. Note how this is different from how the fair value change would have been booked if the bond had not been hedged.
(e) Explain why the interest rate swap is a fair value hedge in this situation.
(f) Explain how an interest rate swap can act as both a fair value hedge and a cash flow hedge.
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Related Book For
Intermediate Accounting
ISBN: 978-0470161012
9th Canadian Edition, Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield.
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