On January 1, 2021, Labtech Circuits borrowed $241,500 from First Bank by issuing a three-year, 6% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 6% fixed interest rate on a notional amount of $241,500 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year. Floating (LIBOR) settlement rates were 6% at inception and 7%, 5%, and 5% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. Those quotes and the fair values of the note are as follows: Fair value of interest rate swap Fair value of note payable January 1 2021 0 $241,500 2021 $ (3,100) $238,400 December 31 2022 $ 2,300 $243,800 2023 $ 0 $241,500 Required: 1. Calculate the net cash settlement at the end of 2021, 2022, and 2023. 2. Prepare the journal entries during 2021 to record the issuance of the note, interest, and necessary adjustments for changes in fair value. 3. Prepare the journal entries during 2022 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value. 4. Prepare the journal entries during 2023 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt. 5. Calculate the book values of both the swap account and the note in each of the three years. 6. Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.) 7. Suppose the fair value of the note at December 31, 2021, had been $227,000 rather than $238,400 with the additional decline in fair value due to investors' perceptions that the creditworthiness of Labtech was worsening. How would that affect your entries to record changes in the fair values? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 Calculate the book values of both the swap account and the note in each of the three years. Date December 31, 2021 December 31, 2022 December 31, 2023 Swap Balance $ 1,859 Credit $ 1,035 Debit $ 0 Note Balance Credit Credit $ 0 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.) (Negative amounts should be indicated by a minus sign.) Net effect on earnings 2021 2022 2023 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 Suppose the fair value of the note at December 31, 2021, had been $107,000 rather than $108,141 with the additional decline in value due to investors' perceptions that the creditworthiness of Labtech was worsening. How would that affect your entries to reco changes in the fair values? (If no entry is required for a transaction/event, select "No journal entry required" in the first account fi Show View transaction list Journal entry worksheet Record the interest. Note: Enter debits before credits. General Journal Debit Credit Date December 31, 2021 Record entry Clear entry View.ceneraliournal
