On January 1, 20X1, Hitchcock Corporation entered into a 5 year interest rate swap agreement The agreement called for the company to make payments based on an 8 fixed notional amount of $500,000 and to receive interest based on a floating interest rate The contract called for cash settlement of the net interest amount at the end of each year The floating rate was to be reset at each cash settlement date Thus, the floating rate for determining each end of year payment is the rate as of the end of the prior year Market (LIBOR) interest rates were 8 at January 1, 20X1, 6 5 at December 31, 20X1, and 9 at December 31, 20X2 The fair value of the swap is as follows January 1, 20X1 December 31, 20X1 December 31, 20X2 Fair value of interest rate swap 0 ($25,693) $12,656 Requirements 1 Complete the following table to show the amounts appearing in Hitchcocks financial statements related to the swap for the years ended December 31, 20X1 and December 31, 20X2 December 31, 20X1 December 31, 20X2 Balance sheet Swap asset (liability) Retained earnings Accumulated other comprehensive income Statement of comprehensive income Net income Other comprehensive income 2 Complete the following table to show the amounts appearing in Hitchcocks statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 20X1 and December 31, 20X2, assuming that the interest rate swap is being used as a perfectly effective cash flow hedge for a $500,000 variable rate note payable issued by Hitchcock December 31, 20X1 December 31, 20X2 Statement of comprehensive income Net income Other comprehensive income 3 Complete the following table to show the amounts appearing in Hitchcocks statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 20X1 and December 31, 20X2, assuming that the interest rate swap is being used as a perfectly effective fair value hedge for a $500,000 investment in a fixed rate note The note is classified as an available for sale security December 31, 20X1 December 31, 20X2 Statement of comprehensive income Net income Other comprehensive income

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 16, 2024

On January 1, 20X1, Hitchcock Corporation entered into a 5-year interest rate swap agreement. The agreement called for the company to make payments based on

On January 1, 20X1, Hitchcock Corporation entered into a 5-year interest rate swap agreement. The agreement called for the company to make payments based on an 8% fixed notional amount of $500,000 and to receive interest based on a floating interest rate. The contract called for cash settlement of the net interest amount at the end of each year. The floating rate was to be reset at each cash settlement date. Thus, the floating rate for determining each end of year payment is the rate as of the end of the prior year. Market (LIBOR) interest rates were 8% at January 1, 20X1, 6.5% at December 31, 20X1, and 9% at December 31, 20X2. The fair value of the swap is as follows:

	January 1, 20X1	December 31, 20X1	December 31, 20X2
Fair value of interest rate swap	0	($25,693)	$12,656

Requirements:

1. Complete the following table to show the amounts appearing in Hitchcocks financial statements related to the swap for the years ended December 31, 20X1 and December 31, 20X2.

	December 31, 20X1	December 31, 20X2
Balance sheet
Swap asset (liability)
Retained earnings
Accumulated other comprehensive income
Statement of comprehensive income
Net income
Other comprehensive income

2. Complete the following table to show the amounts appearing in Hitchcocks statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 20X1 and December 31, 20X2, assuming that the interest rate swap is being used as a perfectly effective cash flow hedge for a $500,000 variable rate note payable issued by Hitchcock.

	December 31, 20X1	December 31, 20X2
Statement of comprehensive income
Net income
Other comprehensive income

3. Complete the following table to show the amounts appearing in Hitchcocks statement of comprehensive income related to the swap and the hedged item for the years ended December 31, 20X1 and December 31, 20X2, assuming that the interest rate swap is being used as a perfectly effective fair value hedge for a $500,000 investment in a fixed rate note. The note is classified as an available-for-sale security.