Question
On January 1, 2014, Comet Company borrowed $10,000,000 of debt due in four years with interest floating at prime. The rate is adjusted, interest is
On January 1, 2014, Comet Company borrowed $10,000,000 of debt due in four years with interest floating at prime. The rate is adjusted, interest is payable and the books are closed on June 30 and and December 31 of each year. Prime currently stands at 5 percent annually. On January 1, 2014, Atlanta National Bank offers Comet a 4-year interest cap with a strike price of 5 percent for $400,000 payable immediately. The prime rate rises to 5.6 percent on June 30. Assume the total value of the cap is $350,000 on 6/30/14 and $330,000 on 12/31/14. Prepare the entries on January 1, 2014, June 30, 2014 and December 31, 2014. Assume that changes in the cap value is recognized as interest is recognized at the end of the period.
Time Value Intrinsic Value Total Value
1/1/14
6/30/14
12/31/14
1/1/14
6/30/14
12/31/14
Fill in the following table that highlights the difference between cash flows and income statement items.
| 6/30/14 | 12/31/14 |
Cash paid interest |
|
|
Interest expense |
|
|
Difference |
|
|
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