Exercise A-2 (Algo) Derivatives; interest rate swap; fixed rate debt [LOA2]

On January 1, 2021, LLB Industries borrowed $370,000 from Trust Bank by issuing a two-year, 8% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. Its intent was to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. The agreement called for the company to receive payment based on a 8% fixed interest rate on a notional amount of $370,000 and to pay interest based on a floating interest rate. The contract called for cash settlement of the net interest amount quarterly. Floating (LIBOR) settlement rates were 8% at January 1, 6% at March 31, and 4% June 30, 2021. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as indicated below.

	January 1			March 31			June 30
Fair value of interest rate swap		0		$	8,172		$	14,794
Fair value of note payable	$	370,000		$	378,172		$	384,794

Required: 1. Calculate the net cash settlement at March 31 and June 30, 2021. 2. Prepare the journal entries through June 30, 2021, to record the issuance of the note, interest, and necessary adjustments for changes in fair value.

Calculate the net cash settlement at March 31 and June 30, 2021.

	March 31	June 30
Net cash settlement

Prepare the journal entries through June 30, 2021, to record the issuance of the note, interest, and necessary adjustments for changes in fair value. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet

Record the issuance of the note.

Note: Enter debits before credits.

Date	General Journal	Debit	Credit
January 01

2. March 31 Record the interest

3. March 31 Record the net cash settlement.

4. March 31 Record the change in fair value of the derivative.

5. March 31 Record the change in fair value of the note.

6. June 30 Record the interest.

7. June 30 Record the net cash settlement.

8. June 30 Record the change in fair value of the derivative.

9. June 30 Record the change in fair value of the note.

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