P17-15.

(Fair Value Hedge Interest Rate Swap)

(LO 6) On December 31, 2017, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2017, is 7%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.

Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows.

Date

6-Month LIBOR Rate

Swap Fair Value

Debt Fair Value

December 31, 2017

7.0%

$10,000,000

June 30, 2018

7.5%

(200,000)

9,800,000

December 31, 2018

6.0%

60,000

10,060,000

Instructions

(a)

Present the journal entries to record the following transactions.

(i)

The entry, if any, to record the swap on December 31, 2017.