On December 31, 2020, Master Corp. had a $10-million, 8% fixed-rate note outstanding that was payable in two years. It decided to enter into a two-year swap with First Bank to convert the fixed-rate debt to floating-rate debt. The terms of the swap specified that Master will receive interest at a fixed rate of 8% and will pay a variable rate equal to the six-month LIBOR rate, based on the $10-million amount. The LIBOR rate on December 31, 2020, was 7%. The LIBOR rate will be reset every six months and will be used to determine the variable rate to be paid for the following six-month period. Master Corp. designated the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting and that IFRS is a constraint. The six-month LIBOR rate and the swap and debt fair values were as follows: 

Instructions 

a. For this transaction, perform analysis using the five-step approach: 

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 without hedge accounting. 

5. Locate where the recognized gains and losses for the hedged and hedging items are recognized. 

b. Present the journal entries to record the following transactions: 

1. The entry, if any, to record the swap on December 31, 2020 

2. The entry to record the semi-annual debt interest payment on June 30, 2021 

3. The entry to record the settlement of the semi-annual swap amount receivable at 8%, less the amount payable at LIBOR, 7% 

4. The entry, if any, to record the change in the swap's fair value at June 30, 2021 

5. The entry, if any, to record the change in the debt's fair value at June 30, 2021 

c. Indicate the amount(s) reported on the statement of financial position and income statement related to the debt and swap for the year ended December 31, 2020. 

d. Indicate the amount(s) reported on the statement of financial position and income statement related to the debt and swap for the six months ended June 30, 2021. 

e. Indicate the amount(s) reported on the statement of financial position and income statement related to the debt and swap for the year ended December 31, 2021. 

f. Assume that the company applies hedge accounting under ASPE. How would the journal entries change?

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6-Month LIBOR Rate Swap Fair Value Debt Fair Value Date Dec. 31, 202o 7.0% $10,000,000 June 30, 2021 7-5% $(200,000) 9,800,000 Dec. 31, 2021 6.0% 60,000 10,060,000