Intermediate accounting 1

682 Chapter 13 prevailing market rate on January 1 of that year. Eden also entered into an interest rate swap agreement related to this loan. Under the terms of the swap agreement, in the years 2003 and 2004, Eden will receive a swap payment based on the principal amount of $1 million. If the January 1 interest rate is greater than 9 percent, Eden will receive a swap payment for the difference; and if the January 1 interest rate is less than 9 percent, Eden will make a swap payment for the difference. The swap payments are made on December 31 of each year. On January 1, 2003, the interest rate is 8 percent, and on January 1, 2004, the interest rate is 12 percent. Requirement: Make the journal entries for the interest rate swap on Eden's books at the dates shown below (assume the interest rate swap is not designated as a hedging instrument; ignore the hedged item, i.e., the loan). For purposes of estimating future swap payments, assume that the current interest rate is the best forecast of the future interest rate (round all entries to the nearest dollar). 1) January 1, 2002 2) December 31, 2002 3) December 31, 2003 4) December 31, 2004 (Adapted) 7. Hay Co. enters into a "receive fixed, pay variable" interest rate swap on July 1, 20x1 for a notional amount of P3,000,000. The set rate is 12%, equal to the current rate on July 1, 20x1. Cash settlement is due on July 1, 20x3. Information on market rates follows: July 1, 20x1.. .12% July 1, 20x2. ..9% July 1, 20x3. ..13% Requirements: a. How much is the derivative asset (liability) to be presented in Hay's June 30, 20x2 statement of financial position? b. Provide the entry on settlement date.4. Brook Co. purchased a put option contract on March 1, 20x1 when Back Yard Co. shares were trading at P180 per share. Brook paid P720 for the option. The option contract gives Brook the right to sell 1,000 shares of Back Yard Co. at P180 per share. The option expires on July 1, 20x1. Mar. 1, 20x1 June 30, 20x1 Spot prices P180 P120 Time value of option 720 180 Requirements: Provide the journal entries. Assume net settlement of the contract. 5. Kelley Co. purchased a put option on Flynn common shares on July 7, 2004, for $170. The put option is for 200 shares and the strike price is $50. The option expires on January 31, 2005. The following data are available with respect to the put option: Date Market Price of Flynn Shares Time Value of Put Option September 30, 2004 $54 per share $88 December 31, 2004 $52 per share 35 January 31, 2005 $55 per share O Requirements: Prepare the journal entries. (Adapted) 6. On January 1, 2002, Eden Ventures, Inc., obtained a three-year, $1 million loan with interest payments due at the end of each year and the principal to be repaid on December 31, 2004. The interest rate for the first year is the prevailing market rate of 9 percent, and the rate each succeeding year will be equal to the 682 Chapter 13 prevailing market rate on January 1 of that year. Eden also entered into an interest rate swap agreement related to this loan. Under the terms of the swap agreement, in the years 2003 and 2004, Eden will receive a swap payment based on the principal amount of $1 million. If the January 1 interest rate is greater than 9 percent, Eden will receive a swap payment for the difference; and if the January 1 interest rate is less than 9 percent, Eden will make a swap payment for the difference. The swap payments are made on December 31 of each year. On January 1, 2003, the interest rate is 8 percent, and on January 1, 2004, the interest rate is 12 percent. Requirement: Make the journal entries for the interest rate swap on Eden's books at the dates shown below (assume the interest rate swap is not designated as a hedging instrument; ignore the hedged item, i.e., the loan). For purposes of estimating future swap payments, assume that the current interest rate is the best forecast of the future interest rate (round all entries to the nearest3. On December 1, 20x1, View Co. enters into a futures contract to sell 100,000 foreign currency units on January 31, 20x2 for P100 per unit. The broker requires an initial margin deposit of P10,000. The current rates are as follows: Basic Derivatives 681 Dec. 1, 20x1 Dec. 31, 20x1 100 Jan. 31, 20x2 98 103 Requirement: Provide the journal entries. 4. Brook Co. purchased a put option contract on March 1, 20x1 when Back Yard Co. shares were trading at P180 per share. Brook paid P720 for the option. The option contract gives Brook the right to sell 1,000 shares of Back Yard Co. at P180 per share. The option expires on July 1, 20x1. Mar. 1, 20x1 June 30, 20x1 Spot prices P180 P120 Time value of option 720 180 Requirements: Provide the journal entries. Assume net settlement of the contract. 5. Kelley Co. purchased a put option on Flynn common shares on July 7, 2004, for $170. The put option is for 200 shares and the strike price is $50. The option expires on January 31, 2005. The following data are available with respect to the put option: Date Market Price of Flynn Shares Time Value of Put Option September 30, 2004 $54 per share $88 December 31, 2004 $52 per share 35 January 31, 2005 $55 per share 0 Requirements: Prepare the journal entries