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Cash Flow Hedge: Interest Rate Cap On July 1, 2020, Molson Coors Brewing Company borrowed $10 million for two years with interest paid semi-annually based
Cash Flow Hedge: Interest Rate Cap On July 1, 2020, Molson Coors Brewing Company borrowed $10 million for two years with interest paid semi-annually based on LIBOR adjusted semiannually. On that date, LIBOR is 2 percent per annum. To hedge against a possible rise in interest rates, on July 2 Molson Coors bought a two-year 2.05 percent interest rate cap for 0.075 percent per year, payable in full immediately. The intrinsic value of the cap is designated as the hedge instrument and the hedge is fully effective. The change in the cap's time value i reported directly in income. LIBOR increased during the second half of 2020 and is reset to 2.15 percent for the first half of 2021. Molson Coors closes its books on December 31 and June 30. The cap's fair value is $11,500 on December 31, 2020, before the rate adjustment, and is $13,500 on June Bo, 2021. Required Prepare all journal entries related to the loan interest and the interest rate cap on July 2, 2020, December 31, 2020, and June 30, 2021. Date Description Debit Credit 7/2/20 0 0 To record premium paid on 2.05% interest rate cap 12/31/20 o . 0 To record interest payable on the loan for the first six months. 0
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