Problem 4 Derivatives; interest rate swap (LOA-2]

On January 1, 2021, Labtech Circuits borrowed $220,000 from First Bank by issuing a three-year, 9% 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 9% fixed interest rate on a notional amount of $220,000 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 9% at inception and 10%, 8%, and 8% 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:

REQUIRED

7) Suppose the fair value of the note at December 31,2021, had been $216,000 rather than $217,041 with the additional decline in fair value due to investors perceptions that the creditworthiness of Labtech was worsening. How would the affect your entries to record changes in the future value?

journal entries

1- Record the interest

2- Record the net cash interest settlement for the interest rate swap. 3- Record the change in fair value of the derivative

4- record the change in fair value of the note

January 1 2021 December 31 2022 $ 2,135 $ 222, 135 Fair value of interest rate swap Fair value of note payable $ (2,959) $ 217,041 $ $220,000 $220,000 cook TER Required: January 1 2021 December 31 2022 $ 2,135 $ 222, 135 Fair value of interest rate swap Fair value of note payable $ (2,959) $ 217,041 $ $220,000 $220,000 cook TER Required