Answered step by step
Verified Expert Solution
Question
1 Approved Answer
On January 1, 2021, JPS Industries borrowed $220,000 from Austin Bank by issuing a three-year, floating rate note based on LIBOR, with interest payable
On January 1, 2021, JPS Industries borrowed $220,000 from Austin Bank by issuing a three-year, floating rate note based on LIBOR, with interest payable semi-annually on June 30 and December of each year. JPS entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a cash flow hedge. The intent was to hedge the risk that interest rates will rise, increasing its semi-annual interest payments. The swap agreement called for the company to receive payment based on a floating interest rate on a notional amount of $220,000 and to pay a 4.0% fixed interest rate. The contract called for cash settlement of the net interest amount semi-annually, and the rate on each reset date (June 30 and December 31) determines the variable interest rate for the following six months. LIBOR rates in 2021 were 4.0% at January 1, 3.0% at June 30, and 5.5% at December 31. The fair values of the swap on those dates, obtained by dealer quotes, were as follows: Swap fair value January 1 June 30 $ 0 December 31 $(2,300) $ 3,600 Required: 1. Calculate the net settlement on June 30, 2021. 2. Prepare journal entries for the period January 1 to December 31, 2021, to record the note payable and hedging instrument, necessary adjustments for changes in fair value, and settlement of the swap contract.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started