Problem 3 and 4

.III Metro by T-Mobile '5' 12:07 AM 4 E]. B ezto.mheducation.com 4. Award: 16.66 points On January 1, 2021, Labtech Circuits borrowed $190,000 from First Bank by issuing a three-year, 8% 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 8% fixed interest rate on a notional amount of $190,000 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 8% at inception and 9%, 7%, and 7% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows: January 1 December 31 2021 2021 2022 2023 Fair value of interest rate swap 0 $ (2,659) $ 1,835 $ 0 Fair value of note payable $190,000 $187,341 $191,835 $190,000 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 $187,000 rather than $187,341 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 Calculate the net cash settlement at the end of 2021, 2022, and 2023. (Negative amounts should be indicated by a minus sign.) Net interest receipts (payments) Required 2 > .III Metro by T-Mobile '5' 12:07 AM 4 E]. B ezto.mheducation.com _ 3, Award: 16.66 points Conrad Playground Supply underwent a restructuring in 2021. The company conducted a thorough internal audit, during which the following facts were discovered. The audit occurred during 2021 before any adjusting entries or closing entries are prepared. a. Additional computers were acquired at the beginning of 2019 and added to the company's office network. The $44,500 cost of the computers was inadvertently recorded as maintenance expense. Computers have five-year useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method. b. Two weeks prior to the audit, the company paid $16,500 for assembly tools and recorded the expenditure as ofce supplies. The error was discovered a week later. c. On December 31, 2020, merchandise inventory was understated by $77,000 clue to a mistake in the physical inventory count. The company uses the periodic inventory system. d. Two years earlier, the company recorded a 5% stock dividend (1,900 common shares, $1 par) as follows: Retained eemings 1,900 Common stock 1,900 The shares had a market price at the time of $11 per share. e. At the end of 2020, the company failed to accrue $102,000 of interest expense that accrued during the last four months of 2020 on bonds payable. The bonds, which were issued at face value, mature in 2025. The following entry was recorded on March 1, 2021, when the semiannual interest was paid, as well as on September 1 of each year: Interest expense 153,000 Cash 153,000 f. Athree-year liability insurance policy was purchased at the beginning of 2020 for $71,700. The full premium was debited to insurance expense at the time. Required: For each error, prepare any journal entry necessary to correct the error, as well as any year-end adjusting entry for 2021 related to the situation described. (Ignore income taxes.) (If no entry is required for a transactionlevent, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record entry necessary for error correction. Note: Enter debits before credits. 8(1) Record entry Clear entry VIEW general journal