P 13-2 Sale commitments, entries, no net settlement US Mill, Inc. sold merchandise to Jang Ltd. for 25,000,000,000 Korean Won, on October 1, 2014. The billing date is on October 1, 2014 and payable in 120 days, on January 30, 2015. Mill decided to enter a forward contract to deliver 25,000,000,000 Korean Won to its exchange broker in 180 days. No net settlement is allowed for the contract. Assume an annual interest rate of 12 percent. Selected exchange rate for Korean won is as follows: Oct, 1, 2014 Dec, 31, 2014 Jan, 30, 2015 Spot rate 50.00096 S0.00094 50.00092 30-day forward rate $0.00095 $0.00093 S0.00093 90-day forward rate $0.00094 $0.00092 $0.00091 120-day forward rate 50.00094 S0.00091 50.00090 Required: Prepare all necessary journal entries and adjusting entries to account for the transaction above. P 13-3 Cash-flow hedges, interest rate swap On January 1, 2011, Cam borrows $400,000 from Ven. The five-year term note is a variable-rate one in which the 2011 interest rate is determined to be 8 percent, the LIBOR rate at January 1, 2011, +2%. Subsequent years' interest rates are determined in a similar manner, with the rate set for a particular ycar equal to the beginning-of-the-year LIBOR rate +2 percent. Interest payments are due on December 31 each year and are computed assuming annual compounding. Also, on January 1, 2011, Cam decides to enter into a pay-fixed, receive-variable interest rate swap arrangement with Gra. Cam will pay & percent Assume that the LIBOR rate on December 31, 2011, is 5 percent. 1. Why is this considered a cash-flow hedge instead of a fair-value hedge? 2. Do you think that this hedge would be considered effective and therefore would qualify for 3. hedge accounting? 4. Assuming that this hedge relationship qualifies for hedge accounting: a. Determine the estimated fair value of the hedge at December 31, 2011. Recall that the hedge contract is in effect for the 2012, 2013, 2014, and 2015 interest payments. b. Prepare the entry at December 31, 2011, to account for this cash-flow hedge as well as the December 31, 2011, interest payment 5. Assuming that the LIBOR rate is 5.5 percent on December 31, 2012, prepare all the necessary entries to account for the interest rate swap at December 31, 2012, including the 2012 interest payment P 13-2 Sale commitments, entries, no net settlement US Mill, Inc. sold merchandise to Jang Ltd. for 25,000,000,000 Korean Won, on October 1, 2014. The billing date is on October 1, 2014 and payable in 120 days, on January 30, 2015. Mill decided to enter a forward contract to deliver 25,000,000,000 Korean Won to its exchange broker in 180 days. No net settlement is allowed for the contract. Assume an annual interest rate of 12 percent. Selected exchange rate for Korean won is as follows: Oct, 1, 2014 Dec, 31, 2014 Jan, 30, 2015 Spot rate 50.00096 S0.00094 50.00092 30-day forward rate $0.00095 $0.00093 S0.00093 90-day forward rate $0.00094 $0.00092 $0.00091 120-day forward rate 50.00094 S0.00091 50.00090 Required: Prepare all necessary journal entries and adjusting entries to account for the transaction above. P 13-3 Cash-flow hedges, interest rate swap On January 1, 2011, Cam borrows $400,000 from Ven. The five-year term note is a variable-rate one in which the 2011 interest rate is determined to be 8 percent, the LIBOR rate at January 1, 2011, +2%. Subsequent years' interest rates are determined in a similar manner, with the rate set for a particular ycar equal to the beginning-of-the-year LIBOR rate +2 percent. Interest payments are due on December 31 each year and are computed assuming annual compounding. Also, on January 1, 2011, Cam decides to enter into a pay-fixed, receive-variable interest rate swap arrangement with Gra. Cam will pay & percent Assume that the LIBOR rate on December 31, 2011, is 5 percent. 1. Why is this considered a cash-flow hedge instead of a fair-value hedge? 2. Do you think that this hedge would be considered effective and therefore would qualify for 3. hedge accounting? 4. Assuming that this hedge relationship qualifies for hedge accounting: a. Determine the estimated fair value of the hedge at December 31, 2011. Recall that the hedge contract is in effect for the 2012, 2013, 2014, and 2015 interest payments. b. Prepare the entry at December 31, 2011, to account for this cash-flow hedge as well as the December 31, 2011, interest payment 5. Assuming that the LIBOR rate is 5.5 percent on December 31, 2012, prepare all the necessary entries to account for the interest rate swap at December 31, 2012, including the 2012 interest payment
