Question
Problem #1 Shortcut Method - Issuer Entries On January 1, 2023, Fontaine Corporation issued an $800,000 notes payable to Allegheny State Bank. The note pays
Problem #1 Shortcut Method - Issuer Entries On January 1, 2023, Fontaine Corporation issued an $800,000 notes payable to Allegheny State Bank. The note pays coupon payments at the rate of 5%, which is also the market rate of interest when the note was issued. The note matures in three years. Fontaine Corporation entered into an interest rate swap with the same maturity and notional amount to hedge against falling interest rates. The swap will result in Fontaine Corporation paying floating rate interest tied to the prevailing LIBOR rate and receiving fixed rate interest at 5%. Interest payments and cash settlement occur at the end of each year. LIBOR settlement rates at the end of 2023, 2024, and 2025 are 6%, 7%, and 6%, respectively.
Shortcut Method - Investor Entries Use the same information as in Problem #1. However, consider the purchase of the note from the perspective of Allegheny State Bank. The bank also hedges the fair value risk by entering into an interest rate swap. The swap will result in Allegheny State Bank receiving floating rate interest tied to the prevailing LIBOR rate and paying fixed rate interest at 5%. REQUIRED: a) Prepare the required journal entries for Allegheny State Bank using the shortcut method for 2023-2025. b) Indicate how the above entries affect Allegheny State Banks reported net earnings for each year.
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